Consider the production cost information for Mama Italiano Sauce given below: Ma

Question

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 53,750 jars of sauce?

Explanation / Answer

Calculation of incremental cost associated with producing extra units: Particulars Amount Ingredient cost( 16000*53750/20000) 43000 Labour cost (9000*53750/20000) 24187.5 Incremental cost 67187.5 So incremental cost is $67187.50 Note: fixed cost remains same irrespective of number of units produced. So there will be no additional fixed cost in producing extra units

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