Plant House operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Plant House has $ 5.0 million in assets. Its yearly fixed costs are $ 600,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon- sized plant total $ 1.25. Plant House’s volume is currently 500,000 units. Competitors offer the same quality plants to garden centers for $ 3.50 each. Garden centers then mark them up to sell to the public for $ 8 to $ 11, depending on the type of plant.
1. Plant House’s owners want to earn a 12% return on the company’s assets. What is Plant House’s target full cost?
2. Given Plant House’s current costs, will its owners be able to achieve their target profit? Show your analysis.
3. Assume that Plant House has identified ways to cut its variable costs to $ 1.10 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the com-pany to achieve its target profit? Show your analysis.
4. Plant House started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Plant House doesn’t expect volume to be affected, but it hopes to gain more control over pricing. If Plant House has to spend $ 100,000 this year to advertise and its variable costs continue to be $ 1.10 per unit, what will its cost- plus price be? Do you think Plant House will be able to sell its plants to garden centers at the cost- plus price? Why or why not?