Question

ChocAttack makes candy bars for vending machines and sells them to vendors in cases of 30 bars. Although Choc Attack makes a variety of candy, the cost differences are insignificant, and the cases all sell for the same price. ChocAttack has a total capital investment of $19,000,000. It expects to produce and sell 650,000 cases of candy next year. ChocAttack requires a 12% target return on investment. Expected costs for next year are: Variable production costs $4.00 per case Variable marketing and distribution costs $2.50 per case Fixed production costs $95,000 Fixed marketing and distribution costs $800,000 Other fixed costs $400,000 ChocAttack prices the cases of candy at full cost plus markup to generate profits equal to the target return on capital.

Read the requirements:

1. What is the target operating income? (Enter the percentage as a whole number.) x = Target operating income x % =

Capital investment	x	Target return on investment		=	Target operating income
$19,000,000	x	12	%	=	$2,280,000

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

Begin by calculating the target revenues by working backwards from the target operating income.

Target revenues
Variable costs
Contribution margin
Fixed costs
Target operating income

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?

Answer 1

Req 1:
Capital Investment *		Target return      =		Target Operating Income
19000,000   *		12%   =		2280000
Req 2:
Variable cost:
Production cost (650000*4)				2600000
Marketing and distribution cost (650000*2.50)				1625000
Total Variable cost				4225000
Fixed cost:
Production cost				95000
Marketing cost				800000
Other fixed cost				400000
Total cost				5520000
Add: Taget income				2280000
Total revenue				7800000
Divide: Number of units				650000
Selling price per unit				12
Req 3:
Sales revenue (611000*13)				7943000
Less: variable cost
Production		(611000*4)		2444000
Marketing		(611000*2.5)		1527500
Contribution margin				3971500
Less: Fixed cost
Production cost				95000
Marketing cost				800000
Other fixed cost				400000
Net income				2676500
Divide: Investment				19,000,000
Rate of return				14.09%
(Net income/Investment)*100