A company is currently producing and selling 250,000 jars of salsa annually. The

Question

A company is currently producing and selling 250,000 jars of salsa 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. What is the incremental cost associated with producing an extra 50,000 jars of salsa? What is the incremental revenue associated with the price reduction of $0.30 per jar? Should Santaigo

Explanation / Answer

incremental revenue ($) = new price - old price = 3.7 - 4 = - 0.3 incremental profit ($) = (new revenue - old revenue)/300,000 = (3.7 * 300,000 - 4 * 250,000) / 300.000 = (1,110,000-1,000,000)/300,000 = 11/30 incremental profit = incremental revenue - incremental cost 11/30 = - 0.3 - incremental cost => incremental cost = - 0.3 - 11/30 = -3/10 - 11/30 = -20/30 = -2/3 = -0.667 ($) as the incremental cost is reduced more than reduction of incremental revenue and it generates profit, the company should go for it.

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