1. Mama Italiano Sauce is in the process of preparing a production cost budget f
ID: 2632877 • Letter: 1
Question
1. Mama Italiano Sauce is in the process of preparing a production cost budget for May. The actual costs in April were:
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
Using this information, prepare a budget for May stating the total amount for the May budget. Assume the budget will increase to 25,000 jars of sauce reflecting anticipated sales increase related to a new marketing campaign
2. 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 59,000 jars of sauce?
3. 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 $3.75 per jar. Suppose this action will increase sales to 312,000 jars of sauce. What is the incremental revenue associated with the price reduction of sauce?
Explanation / Answer
1.
Total cost in case of 20000 units of jars is $36000
In which Variable cost are :
Ingrediant cost=$16000 (For 20000 units of jars) ,So cost for 1 jar of sauce = $16000/20000=$0.8
Labour cost=$9000 (For 20000 units of jars), So the cost of 1 jar of Sauce is =$9000/20000=$0.45
It is known that the fixed cost will mot change with the number iof units of production.
So the budget when the production is 25000 units in May:
=Total Fixed cost+ Total variable cost
(i) Total Fixed cost=Rent+ depreciation+ other=$4000+$6000+$1000=$11000
(which will not change with the number of units of production)
Total Variable cost= Ingrediant cost+Labour cost
Ingrediant cost for 25000 jars=25000* ingrediant cost for one jar=25000*$0.8=$20000
Labour cost for 25000 jars=25000*labour cost for one jar=25000*$0.45=$11250
(ii) Total Variable cost=$20000+$11250=$31250
Total budgeted cost for May = Total fixed cost+ Total variable cost=(i)+(ii)
=$11000+$31250=$42250.
2.
Incremental cost isthe additional cost so it is nothing but the variable cost for the extra units produced.
So the incremental cost with the production of 59000 additional units=
=59000*$0.8+59000*$0.45=$73750 ($0.8 is the ingrediant cost per unit and $0.45 is the labour cost per unit)
3.
(i) Initial revenue by selling 250000 units at $4 per jar=250000*$4=$1000000
(ii) Revenue by selling 312000 units at $3.75 per jar=312000*$3.75=$1170000
Incremental revenue=(ii)-(i)=$1170000-$1000000=$170000
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