Reference no: EM132538828

Question - Andrew makes chocolates for vending machines and sells them to vendors in cases of 30 units. Although Andrew makes a variety of candy, the cost differences are insignificant, and the cases all sell for the same price.

Andrew has a total capital investment of $13,000,000. It expects to produce and sell 500,000 cases of chocolate next year. Andrew requires a 10% target return on investment.

Expected costs for next year are as follows:

Variable production costs $3.50 per case

Variable marketing and distribution costs $1.50 per case

Fixed production costs $1,000,000

Fixed marketing and distribution costs $700,000

Other fixed costs $500,000

Andrew prices the cases of chocolate 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 Andrew needs to charge to earn the target operating income? Calculate the markup percentage on full cost.

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