Question

Zoom-o-licious makes candy bars for vending machines and sells them to vendors in cases of 30 bars. Although Zoom-o-licious makes a variety of candy, the cost differences are insignificant, and the cases all sell for the same price. Zoom-o-licious has a total capital investment of $15,000,000. It expects to produce and sell 300,000 cases of candy next year. Zoom-o-licious requires a 10% target return on investment.Expected costs for next year are:Variable production costs $4.00 per caseVariable marketing and distribution costs $1.00 per caseFixed production costs $300,000Fixed marketing and distribution costs $400,000Other fixed costs $200,000Zoom-o-licious prices the cases of candy at full cost plus markup to generate profits equal to the target return on capital.1. What is the target operating income?2. What is the selling price Zoom-o-licious needs to charge to earn the target operating income? Calculate the markup percentage on full cost.3. Zoom-o-licious's closest competitor has just increased its candy case price to $16, although it sells 36 candy bars per case. Zoom-o-licious is considering increasing its selling price to $15 per case. Assuming production and sales decrease by 4%, calculate Zoom-o-licious' return on investment. Is increasing the selling price a good idea?

Answer 1

Answer:

1.$1,500,000

2.62.50%

3.13.20%

Explanation:

1.

Using this formula

Total Capital investment *Target return on investment=Target operating income

Hence:

$15,000,000x10%

= $1,500,000

2.

Target revenues$3,900,000

Less Variable costs1,500,000

Contribution margin2,400,000

LessFixed costs 900,000

Target operating income$1,500,000

$13 per case must be charge in order to earn the target operating income.

Markup per unit/Full cost per unit

=Markup on full costs

($5.00/$8.00)= 62.50%

3.

Target revenues$4,320,000

Less Variable costs1,440,000

Contribution margin2,880,000

Less Fixed costs900,000

Target operating income$1,980,000

Return on investment for Zoom−o−liciousis

will be 13.20%

Increasing the selling price will be a good idea reason been that the operating income have increase without increasing invested capital, which lead to a more higher return on the investment.