ChocAttack makes candy bars for vending machines and sells t

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?

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

Solution

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