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

Question

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

Production: 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. Te 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 68,750 jars of sauce?

Explanation / Answer

Incremental cost = Variable cost (as fixed cost is fixed and will not change)

Additional variable cost for 68750 jars = 68750 * [(9000+16000)/20000] = 85937.5

[(9000+16000)/20000] this is per unit variable cost calculation

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