Consider the production cost information for Mama Italiano S

Consider the production cost information for Mama Italiano Sauce given below: Mama Italiano 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 250,000 jars of sauce annually. The jars of sauce sell for $4 per jar. The company is considering lowering the price to $3.60 per jar. Suppose this action will increase sales to 322,500 jars of sauce. What is the incremental revenue associated with the price reduction of sauce?

Solution

Answer:

Current Unit Sales = 200,000 Jars
Current Unit Price = $4
Current Revenue = 250,000 * $4
Current Revenue = $1,000,000

Proposed Unit Sales = 322,500 Jars
Proposed Unit Price = $3.60
Proposed Revenue = 322,500 * $3.60
Proposed Revenue = $1,161,000

Incremental Revenue = $1,161,000 - $1,000,000
Incremental Revenue = $161,000

There is a Incremental Revenue of $161,000 on reduction of Price per sauce to $3.60.