Santiago\'s Salsa is in the process of preparing a production cost budget for Ma

Question

Santiago's Salsa is in the process of preparing a production cost budget for May. Actual costs for April were:

33000 jars of Salsa
Incredient cost (var) $26,400 Labor Cost (var) $16,500 Rent (Fixed) $5,040 Depreciation (Fixed) $6,390 Other (Fixed) $1,440 TOTAL $55,770

The company is currently producing and selling 328,800 jars of salsa annually. The jars sell for $5.40 each. The company is considering lowering the price to $4.90. Suppose this action will increase sales to 384,000 jars. What is incremental cost associated with producing an extra 56,000 jars. Increment revenue assoc. with reduction to .50 jar and should Santiago's lower the price of its salsa.

Explanation / Answer

Variable cost per jar is (26,400+ 16,500)/33,000= $1.30. So the incremental cost of the extra 56,000 is 56,000*1.30= 72,800. Incremental revenue is (384,000*4.90)- (328,000* 5.40)= 110,400. Since incremental revenue is greater than incremental cost, the price should be lowered. (assuming of course, that the company has the capacity to increase production that much).

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