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 Italiano 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 250,000 jars of sauce annually. 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 to 306,000 jars of sauce. What is the incremental revenue associated with the price reduction of sauce? Please show calculation

Explanation / Answer

Solution :

Incremental Revenue = New Revenue - Current Revenue

= (306,000 x $3.70) - (250,000 x $4)

= $1,132,200 - $1,000,000

= $132,200

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