Question - Bob's Pizza is preparing a production cost budget for October. Actual costs in September for making 8,000 pizzas are:
Ingredients cost $8,200
Rent 5,100
Labor cost 4,300
Depreciation 800
Other fixed costs 900
The company is currently producing and selling 90,000 pizzas annually with each sold for $15.00. The company is considering lowering the price to $12.50 for which management estimates this will increase sales to 100,000 pizzas. The ingredients and labor are the only variable costs.
a. What is the incremental cost associated with making an additional 100,000 pizzas and what is the incremental revenue associated with the price reduction?
b. Should Bob's Pizza lower the price of its pizzas?