Santiago\'s Salsa is currently producing and selling 250,000 jars of salsa annua
ID: 2374972 • Letter: S
Question
Santiago's Salsa is currently producing and selling 250,000 jars of salsa annually. Fixed costs total $132,000. Variable coasts total $312,500. 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 salsa?
B.) What is the incremental revenue associated with the price reduction of $0.30 per jar?
C.) What is the incremental profit or loss if 300,000 jars are sold?
Explanation / Answer
Santiago's Salsa is currently producing and selling 250,000 jars of salsa annually. Fixed costs total $132,000. Variable coasts total $312,500. 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 salsa?
The incremental costs are the variable costs of the 50,000 jars. Variable cost per unit is 312,500/250,000 = $1.25. Variable cost for 50,000 = $62,500. So the incremental cost is $62,500.
B.) What is the incremental revenue associated with the price reduction of $0.30 per jar?
The revenue had been 250,000*4 = 1,000,000. After the price reduction, it should be 300,000*3.70 = 1,110,000. So the incremental revenue is the difference, which is 110,000.
C.) What is the incremental profit or loss if 300,000 jars are sold?
110,000 – 62,500 = 47,500
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