GreenThumb operates a commercial plant nursery where it propagates plants for garden centres throughout the region. GreenThumb has $5 million in assets. Its yearly fixed costs are $600,000, and the variable costs for the potting soil, container, label, seedling, and labour for each plant total $1.25. GreenThumb’s volume is currently 500,000 units. Competitors offer the same quality plants to garden centres for $3.50 each. Garden centres then mark them up to sell to the public for $8 to $10, depending on the type of plant.
Requirements
1. GreenThumb’s owners want to earn a 12% return on the company’s assets. What is GreenThumb’s target full cost?
2. Given GreenThumb’s current costs, will its owners be able to achieve their target profit? Show your analysis.
3. Assume that GreenThumb 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 company to achieve its target profit? Show your analysis.
4. GreenThumb started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Plant City made this strategy work, so GreenThumb has decided to try it, too. GreenThumb doesn’t expect volume to be affected, but it hopes to gain more control over pricing. If GreenThumb 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 GreenThumb will be able to sell its plants to garden centres at the cost-plus price?
Why or why not?