FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Question 3) Textbook Exercise 13-29: Cost-plus operating income/
13-29 Cost-plus, target return on investment pricing. 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 case |
|
Variable marketing and distribution costs |
$1.00 per case |
|
Fixed production costs |
$300,000 |
|
Fixed marketing and distribution costs |
$400,000 |
|
Other fixed costs |
$200,000 |
Zoom-o-licious prices the cases of candy at full cost plus markup to generate profits equal to the target return on capital.
Required:
- What is the target operating income?
- What is the selling price Zoom-o-licious needs to charge to earn the target operating income? Calculate the markup percentage on full cost.
- 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?
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