Question: Cost-plus, target return on investment pricing. Sweet Tastings makes candy bars for vending machines and sells them to vendors in cases of 30 bars. Although Sweet Tastings makes a variety of candy, the cost differences are insignificant, and the cases all sell for the same price. Sweet Tastings has a total capital investment of $10,000,000. It expects to produce and sell 400,000 cases of candy next year. Sweet Tastings requires a 12% target return on investment. Expected costs for next year are:
Sweet Tastings prices the cases of candy at full cost plus markup to generate profits equal to the target return on capital.
1. What is the target operating income?
2. What is the selling price Sweet Tastings needs to charge to earn the target operating income? Calculate the markup percentage on full cost.
3. Sweet Tastings is considering increasing its selling price to $13 per case. Assuming production and sales decrease by 10%, calculate Sweet Tastings' return on investment. Is increasing the selling price a good idea?