Zoom-o-licious makes candy bars for vending machines and sells them to vendors in cases of 30 bars. Although Zoom-o-licious makes a variety of candy, the cost differences are insignificant, and the cases all sell for the same price. Zoom-o-licious has a total capital investment of $ 15,000,000. It expects to produce and sell 300,000 cases of candy next year. Zoom-o-licious requires a 10% target return on investment. Expected costs for next year are:
Variable production costs ............$ 4.00 per case
Variable marketing and distribution costs .......$ 1.00 per case
Fixed production costs ..............$ 300,000
Fixed marketing and distribution costs .......$ 400,000
Other fixed costs ................$ 200,000
Zoom-o-licious prices the cases of candy at full cost plus markup to generate profits equal to the target return on capital.
Required
1. What is the target operating income?
2. What is the selling price Zoom-o-licious needs to charge to earn the target operating income? Calculate the markup percentage on full cost.
3. Zoom-o-licious’s closest competitor has just increased its candy case price to $ 16, although it sells 36 candy bars per case. Zoom-o-licious is considering increasing its selling price to $ 15 per case. Assuming production and sales decrease by 4%, calculate Zoom-o-licious’ return on investment. Is increasing the selling price a good idea?
