Sams makes axes for the dwarf lords of Moria and sells them in cases of 30 assorted axes. Although Sams makes a variety of axes, the cost differences are insignificant, and the cases all sell for the same price.

Sams has a total capital investment of $10,000,000. It expects to produce and sell 400,000 cases of axes next year, as demand has gone up because of Orc threats. Sams requires a 12% target return on investment.

Expected costs for the 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

Sams prices the cases at full cost plus markup to generate profits equal to the target return on capital.

a) What is the target operating income?

b) What is the selling price Sams needs to charge to earn the target operating income? Calculate the markup percentage on the full cost.

c) Sams is considering increasing its selling price to $13 per case. Assuming production and sales decrease by 10%, calculate Sams' return on investment. Is increasing the selling price a good idea?

Answer rating: 100% (QA)

a What is the target operating income The target operating income is 1200000 This is calculated by t... View the full answer