Consider the production cost information for Mama Italiano Sauce given below: Ma
ID: 2740082 • Letter: C
Question
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 $3.65 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?
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
Explanation / Answer
Incremental revenue associated with the price reduction of sauce
Sales= $1,138,800-$1,000,000= $138,800
Profit = $ 616,800 -$555,500 = $61,300
Mama Italiano Sauce Production Cost Budget Per Annum Per Annum Current After reduction of Price Production - Jars of sauce 250,000 312,000 Sale of Jars of sauce (A) $ 1,000,000.00 $ 1,138,800.00 Ingredient cost (variable) $ 200,000.00 $ 249,600.00 Labor cost (variable) $ 112,500.00 $ 140,400.00 Rent (fixed) $ 48,000.00 $ 48,000.00 Depreciation (fixed) $ 72,000.00 $ 72,000.00 Other (fixed) $ 12,000.00 $ 12,000.00 Total Cost (B) $ 444,500.00 $ 522,000.00 Profit (A-B) $ 555,500.00 $ 616,800.00Incremental revenue associated with the price reduction of sauce
Sales= $1,138,800-$1,000,000= $138,800
Profit = $ 616,800 -$555,500 = $61,300
Work-Sheet First find out Variable cost per unit for Ingredient Cost and Labour cost Variable cost varies with production of Jars of Sauce 1) Calculation of Ingredient cost (variable) per Jar of Sauce = Ingredient cost (variable)/No of Units Produced =16,000/20,000=0.80 per Jar of Sauce Total Variable cost per annum 250,000*0.8 = 200,000 312,000*0.8=249,600 2) Labour Cost (Variable) per Jar of Sauce = Labour Cost(Variable)/No of Units Produced =9,000/20,000= 0.45 per Jar Total Variable cost per annum 250,000*0.45=112,500 312,000*0.45=140,400 Fixed cost per month is given, hence fixed cost per annum is calculated Fixed cost per annum remains same for production of 250000 Jars of sauce and for 312000 Jars of sauce 3) Rent per month - $ 4,000 Rent per Annum -$4,000*12 = $ 48,000 4) Depreciation per month - $ 6,000 Depreciation per Annum -$72,000*12 = $ 48,000 5) Other (fixed) cost per month - $ 1,000 Other (fixed) cost per Annum - $ 1,000*12 = $ 12,000Related Questions
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