Consider the production cost information for Mama Italiano S

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 53,750 jars of sauce?

Solution

Calculation of incremental cost associated with producing extra units: Particulars Amount Ingredient cost( 16000*53750/20000) 43000 Labour cost (9000*53750/20000) 24187.5 Incremental cost 67187.5 So incremental cost is $67187.50 Note: fixed cost remains same irrespective of number of units produced. So there will be no additional fixed cost in producing extra units