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13 July, 16:02

Mickey Tire Company makes a special kind of racing tire. Variable costs are $ 240 per unit, and fixed costs are $ 25 comma 000 per month. Mickey sells 400 units per month at a sales price of $ 315. If the quality of the tire is upgraded, the company believes it can increase the sales price to $ 400. If so, the variable cost will increase to $ 300 per unit, and the fixed costs will rise by 40 %. If Mickey decides to upgrade, how will operating income be affected? A. Operating income will decrease by $ 10 comma 000. B. Operating income will decrease by $ 24 comma 000. C. Operating income will increase by $ 24 comma 000. D. Operating income will remain the same.

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  1. 13 July, 16:26
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    D. Operating Income will remain the same.

    Explanation:

    Change in Operating Income = Current Operating Income - Revised Operating Income

    Current Operating Income = Sales - Variable Cost - Fixed Cost

    Current Sales = $315 X 400 units = $126,000

    Variable Cost = $240 X 400 units = $96,000

    Fixed Cost = $25,000

    Current Operating Income = $126,000 - $96,000 - $25,000 = $5,000

    Revised Operating Income = Revised Sales - Revised Variable Cost - Revised Fixed Cost

    Revised Sales = $400 X 400 units = $160,000

    Revised Variable Costs = $300 X 400 units = $120,000

    Revised Fixed Cost = $25,000 + 40% of $25,000 = $25,000 + $10,000

    = $35,000

    Revised Operating Income = $160,000 - $120,000 - $35,000 = $5,000

    Change in operating Income = $5000 - $5000 = $0

    Correct option is D. Operating Income will remain the same.
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