Green Thumb operates a commercial plant nursery, where it propagates plants for garden centers throughout the region. Green Thumb has $5,300,000 in assets. Its yearly fixed costs are $625,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total $1.70. Green Thumb's volume is currently 490,000 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 $9 to $12, depending on the type of plant.
Requirements
1. Green Thumb's owners want to earn an 10% return on the company's assets. What is Green Thumb's target full product cost?
2. Given Green Thumb's current costs, will its owners be able to achieve their target profit?
3. Assume Green Thumb 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?
4. Green Thumb started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Green Thumb does not expect volume to be affected, but it hopes to gain more control over pricing. If Green Thumb has to spend $135,000 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 Green Thumb will be able to sell its plants to garden centers at the cost-plus price? Why or why not?