Problem:
Making special order and pricing decisions:
Garden House operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Garden House has $ 5,000,000 in assets. Its yearly fixed cost are $ 625,000 and the variable cost for the potting soil, container, label, seedling , and labor for each gallon-size plant total $ 1.70. Garden House's volume is currently 500,000 units. Competitors offer the same plants, at the same quality, to garden centers for $ 4.00 each. Garden centers then mark them up to sell to the public for $8 to $10, depending on the type of plant.
Requirement:
- Garden House's owners want to earn a 12% return on the company's assets. What is Garden House's target full cost?
- Give Garden House's current costs, will its owners be able to achieve their target profit?
- Assume Garden House has identified ways to cut its variable costs to $1.55 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?
- Garden House started an aggressive advertizing campaign strategy to differentiate its plants from those grown by other nurseries. Monrovia Plants made this strategy work so Garden House has decided to try it, too. Garden House does not expect volume to be affected ,but it hopes to gain more control over pricing. If Garden House has to spend $120,000 this year to advertise , and its variable costs continue to be $1.55 per unit , what will its cost-plus price be? Do you think Garden House will be able to sell its plants to garden centers at the cost-plus price? Why or Why not?