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Incremental analysis

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Production Jars of sauce
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

Consider the production cost information for Sally's spaghetti sauce in problem 1. The company is currently producing and selling 250,000 jars of sauce 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 cost associated with producing an extra 50,000 jars of sauce? What is the incremental revenue associated with the price reduction of $0.30 per jar?
b. Should Sally lower the price of the sauce?

Solution Preview

a. Incremental cost is the increase in cost by producing the extra 50,000 jars. The incremental cost would be the variable cost as the fixed cost would not change
The ...

Solution Summary

The solution explains how to do an incremental analysis