Problem:
Incremental Analysis - Consider the production cost information for Santiago's salsa. The company is currently producing and selling 250,000 jars of salsa annually. The jars sell for $4.00 each. The company is considering the price to $3.70. Support this action will increase sales to 300,000 jars.
Santiago's Salsa
Production Costs
April 2008
Production 20,000 Jars of Salsa
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
Required to do:
Q1. What is the incremental cost associated with producing an extra 50,000 jars of salsa?
Q2. What is the incremental revenue associated with the price reduction of $.30 per jar?
Q3. Should Santiago's lower the price of its salsa?