Question

Cakes by Jacki is considering adding a line of sugar-free cake options. Current sales revenue is $5,000 per month. With the new line added, revenues are estimated to be $6,500 per month. Ingredients and labor are currently $2,200 a month. Estimated total ingredient and labor costs with the new line are expected to be $3,000 per month. Jacki estimates that the utilities will increase from $500 to $575. Rent and other costs of $1,200 per month are not expected to change.

In evaluating whether or not to add the new line, the total differential cost equals ______.

a. $1,575
b. $1,275
c. $1,125
d. $875

Answer 1

The total differential cost for Cakes by Jacki to add a line of sugar-free cake options is calculated by summing up the additional costs in ingredients, labor, and utilities. It amounts to $875.

Step-by-step explanation:

In evaluating whether or not to add the new line of sugar-free cake options at Cakes by Jacki, one needs to calculate the total differential cost. The total differential cost is the difference in costs before and after making a change in the business process, in this case, adding a new product line. To calculate the total differential cost, we start with the estimated increase in revenue, which is from $5,000 to $6,500, resulting in an increase of $1,500. However, this is not part of the differential cost since we're asked only about costs, not revenue. Next, we will look at each cost category:

• Ingredients and labor costs increase from $2,200 to $3,000, which is an increase of $800.
• Utilities are estimated to increase from $500 to $575, which is an increase of $75.
• Rent and other costs are expected to remain the same, so there is no increase in this category.

Adding these incremental costs together ($800 for ingredients/labor + $75 for utilities), the total differential cost is $875.