ChocAttack makes candy bars for vending machines and sells themto vendors in cases of 30 bars. Although Choc Attack makes avariety of candy, the cost differences are insignificant, and thecases all sell for the same price. ChocAttack has a total capitalinvestment of $19,000,000. It expects to produce and sell 650,000cases of candy next year. ChocAttack requires a 12% target returnon investment. Expected costs for next year are: Variableproduction costs $4.00 per case Variable marketing and distributioncosts $2.50 per case Fixed production costs $95,000 Fixed marketingand distribution costs $800,000 Other fixed costs $400,000ChocAttack prices the cases of candy at full cost plus markup togenerate profits equal to the target return on capital.
Read the requirements:
1. What is the target operating income? (Enter the percentage asa whole number.) x = Target operating income x % =
Capital investment | x | Target return on investment | = | Target operating income |
$19,000,000 | x | 12 | % | = | $2,280,000 |
2. What is the selling price ChocAttack needs to charge to earnthe target operating income? Calculate the markup percentage onfull cost.
Begin by calculating the target revenues by working backwardsfrom the target operating income.
Target revenues | |
Variable costs | |
Contribution margin | |
Fixed costs | |
Target operating income | |
3. ChocAttack is considering increasing its selling price to $13per case. Assuming production and sales decrease by 6%, calculateChocAttack's return on investment. Is increasing the selling pricea good idea?
