Incremental Analysis [LO 5, 6] Santiago\'s Salsa is in the process of preparing
ID: 1942651 • Letter: I
Question
Incremental Analysis [LO 5, 6]Santiago's Salsa is in the process of preparing a production cost budget for May. Actual costs in April were:
Santiago's Salsa
Production Costs
April 2011
Production 34,200
Jars of Salsa
Ingredient cost (variable) $27,360
Labor cost (variable) 17,100
Rent (fixed) 5,590
Depreciation (fixed) 7,000
Other (fixed) 1,860
Total $58,910
The company is currently producing and selling 326,300 jars of salsa annually. The jars sell for $5.30 each. The company is considering lowering the price to $4.80. Suppose this action will increase sales to 381,300 jars.
What is the incremental cost associated with producing an extra 55,000 jars of salsa?
$
What is the incremental revenue associated with the price reduction of $0.50 per jar?
$
Should Santiago's lower the price of its salsa?
No Yes
Explanation / Answer
first we have to find the variable cost per jar: (27,360 + 17,100) / 34,200 = $ 1.3 so the incremental cost associated with producing an extra 55,000 jars is: 55,000 * 1.30= 71500 the incremental revenue associated with the price reduction of $0.50 per jar is: (381,300 * 4.80) - (326,300 * 5.30) = 100850 Santiago's should lower the price of its salsa because the incremental revenue is greater than the incremental cost