Consider the production cost information for Mama Italiano Sauce given below: Ma

Question

Consider the production cost information for Mama Italiano Sauce given below: Mama Italian Sauce Production Cost Budget April 2008 Production - Jars of sauce 20,000 Ingredient cost (variable) $16,000 Labor cost (variable) 9,000 Rent (fixed) 4,000 Depreciation (fixed) 6,000 Other (fixed) 1,000 Total $36,000 The company is currently producing and selling jars of sauce The jars of sauce sell for $4 per jar. The company is considering lowering the price to $3.70 per jar. Suppose this action will increase sales. What is the incremental costs associated with producing an extra 73,250 jars of sauce? Please show calculation

Explanation / Answer

Solution: Total variable cost = 16,000 + 9,000 = $25,000

variable cost per Jar = $25,000 / 20,000 = $1.25

Incremental costs = 73,250 x $1.25 = $91,562.50

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