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 purchase 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 $4,950. At that price, annual sales of the sorbet machine should be 100 units. If the sorbet machine is added to National Restaurant Supply’s product lines, the company will have to invest $600,000 in inventories and special warehouse fixtures. The variable cost of selling the sorbet machines would be $650 per machine. Required: 1. If National Restaurant Supply requires a 15% return on investment (ROI), what is the maximum amount the company would be willing to pay the Swedish manufacturer for the sorbet machines? 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. Construct a chart that shows National Restaurant Supply’s ROI as a function of the purchase price of the sorbet machine. Put the purchase price on the X-axis and the resulting ROI on the Y-axis. Plot the ROI for purchase prices between $3,000 and $4,000 per machine. 3. After many hours of negotiations, management has concluded that the Swedish manufacturer is unwilling to sell the sorbet machine at a low enough price so that National Restaurant Supply is able to earn its 15% required ROI. Apart from simply giving up on the idea of adding the sorbet machine to National Restaurant Supply’s product lines, what could management do?
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 purchase 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 $4,950. At that price, annual sales of the sorbet machine should be 100 units. If the sorbet machine is added to National Restaurant Supply’s product lines, the company will have to invest $600,000 in inventories and special warehouse fixtures. The variable cost of selling the sorbet machines would be $650 per machine.
Required:
1. If National Restaurant Supply requires a 15%
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. Construct a chart that shows National Restaurant Supply’s ROI as a function of the purchase price of the sorbet machine. Put the purchase price on the X-axis and the resulting ROI on the Y-axis. Plot the ROI for purchase prices between $3,000 and $4,000 per machine.
3. After many hours of negotiations, management has concluded that the Swedish manufacturer is unwilling to sell the sorbet machine at a low enough price so that National Restaurant Supply is able to earn its 15% required ROI. Apart from simply giving up on the idea of adding the sorbet machine to National Restaurant Supply’s product lines, what could management do?
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