Question

Sweet Love Ltd. makes chocolate candy bars and sells them to vendors in cases of 30 bars. Although Sweet Love Ltd. makes a variety of chocolate candy bars, the cost differences are insignificant and the cases all sell for the same price.

Sweet Love Ltd. has a total investment in capital of $13 000 000. It expects to sell 500 000 cases of chocolate candy bars next year, as it has had relatively constant sales over the past few years. Sweet Love Ltd. requires a 10% target return on investment. Expected costs for next year are:

Variable production costs	$3.5 per case
Variable marketing & distribution costs	1.5 per case
Fixed production costs	$1 000 000
Fixed marketing & distribution costs	$700 000
Other fixed costs	$500 000

Sweet Love Ltd. prices the cases of chocolate candy bars at full cost plus mark‐up to generate profits equal to the target return on capital.

Required:

1. How much is the target operating profit?

2. How much is the selling price Sweet Love Ltd. needs to charge to earn the target operating profit? Calculate the mark‐up percentage on full cost.

3. Sweet Love Ltd.’s closest competitor has just increased its price per case of chocolate candy bars to $15, although it sells 36 chocolate candy bars per case. Sweet Love Ltd. is considering increasing its selling price to $14 per case. Assuming that production and sales decrease by 5%, calculate Sweet Love Ltd.’s return on investment. Is increasing the selling price a good idea?

Answer 1

1. How much is the target operating profit?
Target operating profit = Capital investment * Rate of return
Capital investment		$13,000,000
Rate of return		10%
Target operating profit		$13,00,000
2. How much is the selling price Sweet Love Ltd. needs to charge to earn the target operating profit? Calculate the mark‐up percentage on full cost.
Particulars	Total amount	amount per unit ($)	No of cases
Sales	6000000	$12	500000
Less :
Production cost	1750000	$3.50
Marketing & Distribution	750000	$1.50
Total variable costs	2500000	$5.00
Contribution	3500000	$7.00
Less:
Production costs	1000000
Marketing & Distribution	700000
Other	500000
Total fixed costs	2200000
Target operating profit	1300000
Total variable costs	2500000
Total fixed costs	2200000
Total costs	4700000
Mark up %	27.66%
Profit/Total cost
3. Sweet Love Ltd.’s closest competitor has just increased its price per case of chocolate candy bars to $15, although it sells 36 chocolate candy bars per case. Sweet Love Ltd. is considering increasing its selling price to $14 per case. Assuming that production and sales decrease by 5%, calculate Sweet Love Ltd.’s return on investment. Is increasing the selling price a good idea?
Particulars	Total amount	amount per unit ($)	No of cases
Sales	6650000	$14	475000
Less :
Production cost	1662500	$3.50
Marketing & Distribution	712500	$1.50
Total variable costs	2375000	$5.00
Contribution	4275000	$9.00
Less:
Production costs	1000000
Marketing & Distribution	700000
Other	500000
Total fixed costs	2200000
Target operating profit	2075000
	No.of cases
Existing	500000
Less : sale on 5%	-25000
Revised selling units	475000
Capital investment	$13,000,000
Revised profit	$2,075,000
Return on investment	16%
Yes. This will increase Opreating profit and will increase Return on investment as well.