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Huntsville Tomatoes has a plant that can process vineyard tomatoes, along with other ingredients,

into various tomato sauces and salsas. The company can sell all of its unprocessed vineyard

tomatoes at a selling price of $6.15 per kilogram. In the past, the company has sold only part of its unprocessed vineyard tomatoes and has retained the rest for further processing into tomato sauces and salsas. The salsa has been selling for $8.75 per kilogram, but recently the price has become unstable and has dropped to $7.80 per kilogram. The costs and revenues associated with a kilogram

of salsa follow:

Per Kilogram of Salsa

Selling price $7.80

Cost to manufacture:

Raw materials:

Extra salsa ingredients $1.00

Unprocessed tomatoes (1 kg) 5.90 6.90

Direct labour 0.25

Manufacturing overhead 0.75

Manufacturing profit (loss) $ ( 0.10)

Because of the weak price for the company's processed sauces and salsas, the sales manager

believes that the company should discontinue processing the salsas and instead simply sell the

unprocessed vineyard tomatoes. Current cost and revenue data on the unprocessed vineyard

tomatoes follow:

Per Kilogram of Tomatoes

Selling price $6.15

Cost to manufacture:

Seeds, pesticides, and fertilizers $4.90

Direct labour 0.25

Manufacturing overhead 0.75 5.90

Manufacturing profit $0.25

The sales manager argues that since the present $7.80 per kilogram price for the salsa results in a

$0.10 per kilogram loss, the

production of salsa should not be resumed until the price per kilogram

rises above $7.90. The company assigns manufacturing overhead cost to the two products on the

basis of labour hours but virtually all manufacturing overhead costs are fixed. Materials a

nd labour costs are variable. The company can sell all of the unprocessed vineyard tomatoes and salsa it can

produce at the current market prices.

Required:

1.Do you agree with the sales manager that the company should discontinue the processing of

salsa and

use the entire labour capacity to grow, sort, and package tomatoes if the price of salsa

2.What is the lowest price that the company should accept for a kilogram

of salsa? Again support your answer with computations and explanations.

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