Cost-plus, target return on investment pricing, Vend-o-licious makes candy bars for vending machines and sells them to vendors in cases of 30 bars. Although Vend-o-licious makes a variety of candy, the cost differences are insignificant, and the cases all sell for the same price. Vend-o-licious has a total investment in capital of $13,000,000. It expects to sell 500,000 cases of candy next year, as it has had relatively constant sales over the past few years. Vend-o-licious requires a 10% target return on investment.

Expected costs for next year are:

Vend-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 Vend-o-licious needs to charge to earn the target operating income? Calculate the markup percentage on full cost

3. Vend-o-Iicious’s closest competitor has just increased its candy case price to $15, although it sells 36 candy bars per case. Vend-o-Iicious is considering increasing its selling price to $14 per case. Assuming sales decrease by 5%, calculate Vend-o-licious’ return on investment. Is increasing the selling price a good idea?

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$3.50 per case $1.50 per case Variable production costs Variable marketing and distribution costs Fixed production costs $1,000,000 Fixed marketing and distribution costs $700,000 Other fixed costs $500,000