Question - Vend-a-Bar Supply Company makes chocolate bars exclusively for vending machines and sells them to vending machine operators in cases of 30 bars. Vend-a-Bar makes a variety of chocolate bars, but as their size and manufacturing processes are standardised there are no significant cost differences between bars and they are all sold at the same price.
The Vend-a-Bar Supply Company has a mature and stable business with a capital employed of $26 million. The company expects to sell 500,000 cases of chocolate bars next year and requires a 10% return on capital employed (ROCE). Expected costs for next year have been budgeted as follows:
Variable production costs $7 per case
Variable selling and distribution costs $3 per case
Fixed production cost $2,000,000 per annum
Fixed selling and distribution costs $1,400,000 per annum
Other fixed costs $1,000,000 per annum
Vend-a-Bar originally intended to price its cases of chocolate bars at full cost plus a mark up that will generate enough profit to meet the company's target return on capital employed.
Management have just discovered that the company's closest competitor, Vend-o-Choc, has just increased its price for a case of similar chocolate bars to $30. Note, however, that Vend-o-Choc sells cases containing 36 chocolate bars each. This news has prompted the
Sales Director to recommend increasing Vend-a-Bar's selling prices for the coming year to $28 per case (of 30 bars) as she believes that this increase in price will only reduce sales volumes by 10%.
a. Compute the target operating income for next year.
b. Compute the selling price that Vend-a-Bar needs to charge to earn and calcuate the mark-up percentage on full cost.