Mickey Tire Company makes a special kind of racing tire
Variable costs are $225 per unit, and fixed costs are $30,000 per month. Mickey sells 500 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 $349. If so, the variable cost will increase to $234 per unit, and the fixed costs will rise by 50%. If Mickey decides to upgrade, how will operating income be affected?
A) Operating income will decrease by $15,000.
B) Operating income will decrease by $4,500.
C) Operating income will increase by $4,500.
D) Operating income will remain the same.
D .D)
Sales as is Further processing
Sales revenue $155,000 $174,500
Less: Variable cost 112,500 117,000
Less: Fixed cost 30,000 45,000
Operating income $12,500 $12,500
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