Help please.thanks 13-29 Cost-plus, target return on investment pricing. Sweet T
ID: 2431998 • Letter: H
Question
Help please.thanks
13-29 Cost-plus, target return on investment pricing. Sweet Tastings makes candy bars for vending machines and sells them to vendors in cases of 30 bars. Although Sweet Tastings makes a variety of candy, the cost differences are insignificant, and the cases all sell for the same price. calculated in requirement 1? Sweet Tastings has a total capital investment of $10,000,000. It expects to produce and sell 400,000 cases of candy next year. Sweet Tastings requires a 1 2% target return on investment. Expected costs for next year are: Variable production costs Variable marketing and distribution costs Fixed production costs Fixed marketing and distribution costs Other fixed costs $3.00 per case $2.00 per case $400,000 $700,000 $500,000 Sweet Tastings 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 Sweet Tastings needs to charge to earn the target operating income? Calcu- late the markup percentage on full cost. 3. Sweet Tastings is considering increasing its selling price to $13 per case. Assuming production and sales decrease by 10%, calculate Sweet Tastings, return on investment. Is increasing the selling price a good idea?Explanation / Answer
Solution 1:
Target operating income = $10,000,000 * 12% = $1,200,000
solution 2:
Total cost of 400000 cases of candy = Fixed cost + variable cost per unit * Nos of units
= ($400,000 + $700,000 + $500,000) + ($3 + $2)*400000 = $3,600,000
Total sale value to earn target operating income = Total cost + target operating income = $3,600,000 + $1,200,000 = $4,800,000
Selling price to be charged to earn target operating income = $4,800,000 / 400000 = $12 per case
markup percentage on full cost = $1,200,000 / $3,600,000 = 33.33%
Solution 3:
Sales volume at selling price of $13 = 400000*90% = 360000 cases
Variable cost per unit = $3 + $2 = $5
Contrbution margin per case = $13 - $5 = $8 per cases
New operating income after increase in selling price = (360000*$8) - $1,600,000 = $1,280,000
New Return on investment = $1,280,000 / $10,000,000 = 12.8%
As net operating income and ROI is increased on increase selling price, therefore increasing the selling price is a good idea.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.