Question 3) Textbook Exercise 13-29: Cost-plus operating income/return on investment pricing. 13-29 Cost-plus, target return on investment pricing. 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: What is the target operating income? What is the selling price Zoom-o-licious needs to charge to earn the target operating income? Calculate the markup percentage on full cost. 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?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Question 3) Textbook Exercise 13-29: Cost-plus operating income/return on investment pricing.

13-29 Cost-plus, target return on investment pricing. 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:

What is the target operating income?
What is the selling price Zoom-o-licious needs to charge to earn the target operating income? Calculate the markup percentage on full cost.
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?

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