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 63,500 jars of sauce? Round to two decimal places. Your Answer:

Answer 1

The incremental costs associated with producing extra jars of sauce shall be sum of all the variable costs as fixed costs shall remain the same no matter what the production level is. Fixed costs don't change with the increase in production.

Variable costs associated with production are ingredient cost & labor cost

Labor cost for 20000 jars = $9000

Labor cost for 63500 jars = 9000 / 20000 * 63500 = 28575

Ingredient cost for 20000 jars =$16000

Ingredient cost for 63500 jars = 16000/20000 *63500 = 50800

Total incremental cost for 63500 jars = Labor cost + ingredient cost

= 28575 + 50800

= $79,375