Question
Candy Mania makes candy bars for vending machines and sells them to vendors in cases of 30 bars. Although Candy Mania makes a variety of
Candy Mania makes candy bars for vending machines and sells them to vendors in cases of 30 bars. Although Candy Mania makes a variety of candy, the cost differences are insignificant, and the cases all sell for the same price.
Candy Mania has a total capital investment of $10,000,000. It expects to produce and sell 400,000 cases of candy next year. The company requires a 12% target return on investment.
Expected costs for next year are:
Variable production costs | $3.00 per case |
Variable marketing and distribution costs | $2.00 per case |
Fixed production costs | $400,000 |
Fixed marketing and distribution costs | $700,000 |
Other fixed costs | $500,000 |
Candy Mania 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 Candy Mania needs to charge to earn the target operating income? Calculate the markup percentage on full cost.
- Candy Mania is considering increasing its selling price to $13 per case. Assuming production and sales decrease by 10%, calculate Candy Manias return on investment. Is increasing the selling price a good idea?
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