Author Question: Cost-plus, target return on investment pricing. Zoom-o-licious makes candy bars for vending ... (Read 55 times)

rl · **on:** Jul 6, 2018

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:

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?

Question 2

The account number is recorded in the Post. Ref. column of the general journal when the transaction is first recorded in the journal.
a. True
b. False
Indicate whether the statement is true or false

Pamela.irrgang@yahoo.com · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

1. Target operating income = Return on capital in dollars = 15,000,000 10 = 1,500,000

2.
Revenues 3,900,000
Variable costs (4.00 + 1.00) 300,000 cases
1,500,000
Contribution margin 2,400,000
Fixed costs (300,000 + 400,000 + 200,000) 900,000
Operating income (from requirement 1) 1,500,000
solve backwards for revenues

Selling price = 13 per case.
Markup on full cost
Full cost = 1,500,000 + 900,000 = 2,400,000
Unit cost = 2,400,000 300,000 cases = 8.00 per case
Markup on full cost = 62.50

3.
Budgeted Operating Income
For the year ending December 31, 20xx
Revenues (15 288,000 cases)
4,320,000
Variable costs (5 288,000 cases)
1,440,000
Contribution margin 2,880,000
Fixed costs 900,000
Operating income 1,980,000
New units = 300,000 cases 96 = 288,000 cases

Return on investment = 13.2

Yes, increasing the selling price is a good idea because operating income increases without increasing invested capital, which results in a higher return on investment. The new return on investment exceeds the 10 target return on investment.

Answer to Question 2

False