PROBLEM 1-2. Incremental Analysis [LO 5, 6] Consider the production cost informa

Question

PROBLEM 1-2. Incremental Analysis [LO 5, 6] Consider the production cost information for
Santiago’s Salsa in Problem 1-1. The company is currently producing and selling 325,000 jars of
salsa annually. The jars sell for $5.00 each. The company is considering lowering the price to $4.60.
Suppose this action will increase sales to 375,000 jars.

a. What is the incremental cost associated with producing an extra 50,000 jars of salsa?
b. What is the incremental revenue associated with the price reduction of $0.40 per jar?
c. Should Santiago’s lower the price of its salsa?

Explanation / Answer

The company's current Production and Sales = 325,000 jars annually Selling Price per Jar = $5.00 The company is considering lowering the price to $4.60, this action will increase sales to 375,000 jars. (b) Incremental revenueAssociated with the price reduction of $0.40 per jar: 325,000 * $5.00 = $1,625,000 375,000 * ($5 - $0.40) $4.60 = $1,725,000 Incremental Revenue = [$1,725,000 - $1,625,000] Incremental Revenue = $100,000 (c) Yes, Santiago should lower the price of its Jars, because lower the prices Santiago would get more revenue. Reducing the Price per Jar would increase Sales. Hence, we get more revenue of this increased sales.

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