Consider the production cost information for Meatball Sauce given below: Meatbal
ID: 2661311 • Letter: C
Question
Consider the production cost information for Meatball Sauce given below:
Meatball Sauce
Production Cost Budget
April 2010
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 300,000 jars of sauce. What is the incremental costs associated with producing an extra 72,500 jars of sauce?
Meatball Sauce
Production Cost Budget
April 2010
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
Explanation / Answer
Hi,
Please find the answer as follows:
You only need to consider the variable costs to calculate the incremental costs:
Ingredient cost (variable) = 16000/20000*72500 = 58000
+
Labor Cost (variable) = 9000/20000*72500 = 32625
Total Incremental Cost = 58000 + 32625 = 90625
Answer is 90625.
Thanks.
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