Victory Tire Company makes a special kind of racing tire
Variable costs are $210 per unit, and fixed costs are $30,000 per month. Victory sells 700 units per month at a sales price of $310. If the quality of the tire is upgraded, the company believes it can increase the sales price to $350. If so, the variable cost will increase to $240 per unit, and the fixed costs will remain the same. If Victory decides to upgrade, how will it affect operating income?
A) Operating income will decrease by $7,000.
B) Operating income will decrease by $21,000.
C) Operating income will increase by $21,000.
D) Operating income will increase by $7,000.
D .D)
Sales as is Further processing
Sales revenue $217,000 $245,000
Less: Variable cost 147,000 168,000
Contribution margin per unit $70,000 $77,000
Increase in operating income $7,000
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