ChocAttack makes candy bars for vending machines and sells them to vendors in cases of 30 bars.
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Question:
ChocAttack makes candy bars for vending machines and sells them to vendors in cases of 30 bars. Although ChocAttack makes a variety of candies, the cost differences are insignificant, and the cases all sell for the same price.
- ChocAttack has a total capital investment of $12,000,000. It expects to produce and sell 450,000 cases of candy next year. ChocAttack requires a 12% target return on investment.
- Expected costs for next year are shown below:
Variable production costs | $4.00 per case |
Variable marketing and distribution costs | $1.50 per case |
Fixed production costs | $435,000 |
Fixed marketing and distribution costs | $800,000 |
Other fixed costs | $250,000 |
- ChocAttack prices the cases of candy at full cost plus markup to generate profits equal to the target return on capital.
- Required
- 1. What is the target operating income?
- 2. What is the selling price ChocAttack needs to charge to earn the target operating income? Calculate the markup percentage on full cost.
- 3. ChocAttack is considering increasing its selling price to $13 per case. Assuming production and sales decrease by 6%, calculate ChocAttack's return on investment. Is increasing the selling price a good idea?
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