Merrimack Tire Company makes a special kind of racing tire
Variable costs are $210 per unit, and fixed costs are $35,000 per month. Merrimack sells 400 units per month at a sales price of $310. If the quality of the tire is upgraded, the company believes it can increase the price to $330. If so, the variable cost will increase to $220 per unit, and the fixed costs will rise by 20%. If Merrimack decides to upgrade, how will operating income be affected?
A) Operating income will decrease by $8,000.
B) Operating income will decrease by $3,000.
C) Operating income will increase by $8,000.
D) Operating income will increase by $20.
B .B)
Sales as is Further processing
Sales revenue $124,000 $132,000
Less: Variable cost 84,000 88,000
Less: Fixed cost 35,000 42,000
Operating income $5,000 $2,000
Decrease in operating income $3,000
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