Question - Nature House operate a commercial plant nursery where it propagates plants for garden centers throughout the region. Nature House has $4.9 million in assets. Its yearly fixed costs are $682,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-sized plant total $1.30. Nature House's volume is currently 480,000 units. Competitors offer the same quality plants to garden centers for $4.00 each. Garden centers then mark them up to sell to the public for $9 to $11, depending on the type of plant.
1. Nature House's owners want to earn a 14% return on the company's assets. What is Nature House's target full cost?
2. Given Nature House's current costs, will its owners be able to achieve their target profit? Show your analysis.
3. Assume that Nature House has identified ways to cut its variable costs to $1.15 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit? Show your analysis.
4. Nature House started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Nature House doesn't expect volume to be affected, but it hopes to gain more control over pricing. If Nature House has to spend $110,400 this year to advertise and its variable costs continue to be $1.15 per unit, what will its cost-plus price be. Do you think Nature House will be able to sell its plants to garden centers at the cost-plus price? Why or why not?