Snappy Plants operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Snappy Plants has $5,100,000 in assets. Its yearly fixed costs are $650,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total $1.90. Snappy Plants's volume is currently 500,000 units. Competitors offer the same plants, at the same quality, to garden centers for $4.25 each. Garden centers then mark them up to sell to the public for $9 to $12, depending on the type of plant.
Requirements
1. Snappy Plants's owners want to earn a 11% return on investment on the company's assets. What is Snappy Plants's target full product cost?
2. Given Snappy Plants's current costs, will its owners be able to achieve their target profit?
3. Assume Snappy Plants has identified ways to cut its variable costs to $1.75 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?
4. Snappy Plants started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Snappy Plants does not expect volume to be affected, but it hopes to gain more control over pricing. If Snappy Plants has to spend $105,000 this year to advertise and its variable costs continue to be $1.75 per unit, what will its cost-plus price be?
Do you think Snappy Plants will be able to sell its plants to garden centers at the cost-plus price? Why or why not?