So, the following given is a lecture example (which is solved) and on the same information, answer the question.

Following on from the workshop example

(Mars), now assume the cost base is

variable cost - what is the mark-up and

the resulting pri

G 3G Ill Rilll 8:42 9 . Vo)) LTE1 4G1 59 achieve target ROI + included in cost base Markup percentage = ACC305 T1 2... X cost O e per unit d in cost - pre pricing ila KAPLAN BUSINESS SCHOOL 24 A Workshop Example: Cost-plus Mars has total investment in capital of $13 million and expects to sell 500,000 cases of chocolate bars (30 bars in each) next year. Mars requires a 10% target ROI. Expected costs for next year are: Variable prodn costs: $ 3.50 per case Variable Mking & Distb costs: $ 1.50 per case Fixed prodn costs: $ 1,000,000 Fixed Mking & Distb costs: $ 700,000 Other fixed costs: $ 500,000 Mars prices the cases of chocolate bars at absorption full cost plus mark-up to generate profits equal to the target ROI on capital. Q1. What is the target operating profit? Q2. What is the mark-up percentage on full cost needed to hit target operating profit and what is the resulting price? KAPLAN BUSINESS SCHOOL AUSTRALIA 25 Workshop Example Solution: Cost-plus Q1) The target operating profit is equal to the target ROI multiplied by the capital invested: 10% x $13m = $1.3m Q2) For the mark-up percentage, use the formula: profit required to + total annual costs not Markup percentage = _achieve target ROI included in cost base annual volume X cost base per unit used in cost-plus pricing formula Because cost is defined as absorption full cost, all costs are included in the cost base and the total annual costs not included are zero. Markup % = $1.3m + $0 0.5m cases x $9.40* . $3.50 + $1.50 + ($2.2m / 0.5m cases) $1.3m / $4.7m = 0.277 or 27.7% Price = $9.40 x 1.277 = $12 KAPLAN BUSINESS SCHOOL AUSTRALIA 26 In-Class Activity 3