Consider the production cost information for Mama Italiano Sauce given below: Ma
ID: 2759072 • 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 $3.75 per jar. Suppose this action will increase sales to 310,500 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 = New sales unit * unit sale price - old sales unit* old unit sale price
Incremental revenue associated with the price reduction of sauce = 310500*3.75-250000*4
Incremental revenue associated with the price reduction of sauce = $ 164,375
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