Incremental Analysis

 

Suzy’s Soups is in the process of preparing a production cost budget for the coming month.

Actual costs at the end of the current month were:

Production25,000 Jars of soupIngredient cost (variable)$20,000Labor cost (variable)12,000Depreciation (fixed)6,000Other (fixed)1,000Total$39,000

REQUIRED

  1. Using this information, prepare a budget for the coming month. Assume that production will increase to 30,000 jars of soup, reflecting an anticipated sales increase related to a new marketing campaign.
  2. Does the budget suggest that additional workers are needed (each worker can work only 40 hours per week)? Suppose the wage rate is $20 per hour. How many additional labor hours are needed for the coming month? What would happen if management did not anticipate the need for additional labor in the coming month?
  3. Calculate the actual cost per unit at the end of the current month and the budgeted cost per unit for the coming month. Explain why the cost per unit is expected to decrease.

The company is currently producing and selling 325,000 jars of soup annually. The jars sell for $5.00 each. The company is considering lowering the price to $4.60. Suppose this action will increase sales to 375,000 jars.

  1. What is the incremental cost associated with producing an extra 50,000 jars of soup?
  2. What is the incremental revenue associated with the price reduction of $0.40 per jar?
  3. Should Suzy’s lower the price of its soup?

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