Turnberry Tomatoes has a plant that can process vine-ripened tomatoes, along with other ingredients, into various tomato sauces and salsas. The company can sell all of its unprocessed vine-ripened tomatoes at a selling price of $6.15 per kilogram. In the past, the company has sold only part of its unprocessed vine-ripened 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:

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 vine-ripened tomatoes. Current cost and revenue data on the unprocessed vine-ripened tomatoes follow:

The sales manager argues that since the current $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 and labour costs are variable. The company can sell all of the unprocessed vine-ripened 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 remains at $7.80 per kilogram? Support your answer with computations and explanations.
2. What is the lowest price that the company should accept for a kilogram of salsa? Again support your answer with computations and explanations.

Transcribed Image Text:

Per Kilogram of Salsa Selling price. Cost to manufacture: Raw materials: Extra salsa ingredients.... Unprocessed tomatoes (1kg). Direct labour .. Manufacturing overhead. Manufacturing profit (loss). $ 780 $100 6.90 0.25 590 0.75 S(0.10)