Problem: Target Costing
National Restaurant Supply, Inc., sells restaurant equipment and supplies throughout most of the United States. Management is considering adding a machine that makes sorbet to its line of ice cream making machines. Management will negotiate the price of the sorbet machine with its Swedish manufacturer.
Management of National Restaurant Supply believes the sorbet machine can be sold to its customers in the United States for $3,865. At that price, annual sales of the sorbet machine should be 83 units. If the sorbet machine is added to National Restaurant Supply's product lines, the company will have to invest $59,000 in inventories and special warehouse fixtures. The variable cost of selling the sorbet machines would be $340 per machine.
Required: 1. If National Restaurant Supply requires a 23% return on investment (ROI), what is the maximum amount the company would be willing to pay the Swedish manufacturer for the sorbet machines? (Round your final answers to nearest whole dollar.)
2. The manager who is flying to Sweden to negotiate the purchase price of the machines would like to know how the purchase price of the machines would affect National Restaurant Supply's ROI. Compute the ROI for purchase prices between $2,600 and $3,600 per machine. (Negative answers should be indicated by a minus sign. Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3)