Consider the production cost information for Santiago\'s Salsa in problem 1. The

Question

Consider the production cost information for Santiago's Salsa in problem 1. The company is currently producing and selling 250,000 jars of salsa annually. The jars sell for $4.00 each. The company is considering lowering the price to $3.70. Suppose this action will increase sales to 300,000 jars.

A. What is the incremental coast associated with producing an extra 50,000 jars of salsa?

B. What is the incremental revenue associated with the price reduction of $0.30 per jar?

C. Should Santiago's lower the price of its salsa?

Explanation / Answer

incremental revenue ($) = new price - old price = 3.7 - 4 = - 0.3
incremental profit ($) = (new revenue - old revenue)/300,000
= (3.7 * 300,000 - 4 * 250,000) / 300.000 = (1,110,000-1,000,000)/300,000 = 11/30
incremental profit = incremental revenue - incremental cost
11/30 = - 0.3 - incremental cost
=> incremental cost = - 0.3 - 11/30 = -3/10 - 11/30 = -20/30 = -2/3 = -0.667 ($)
as the incremental cost is reduced more than reduction of incremental revenue and it generates profit, the company should go for it.   

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.