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.

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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