Gupta Greenhouses is in the gardening business. Given its limited resources, it grows one, and only one, type of vegetable each winter to sell in the spring growing season. Gupta obtains approximately 1,000,000 seeds from a local supplier and is trying to decide whether to grow cucumbers or tomatoes. Cucumber seeds cost $14,000 per 1,000,000, while tomato seeds cost $23,000 per million.

With current facilities, approximately 30 percent of cucumber seeds and 20 percent of tomato seeds can be successfully raised as sellable seedlings. Cucumbers take approximately 4 weeks to grown to a salable size, while tomato take 5 weeks. Tomatoes also require more care than cucumbers. Each week, tomatoes need two waterings and 2 mineral feedings, while cucumber need only one watering change and one mineral feeding. Each watering costs $250 and each feeding costs $500. The cost to package either a cucumber or tomato plant for distribution is the same -- $.03 for each plastic pot.

Heating and lighting costs equal $2,000 per week, regardless of which type of vegetable is grown. However, growing cucumbers only requires heating and lighting for four weeks, while tomatoes require 5 weeks of heating and lighting) Fixed overhead costs, including rent, insurance and staff amount to $15,000 a year. Gupta can sell cucumber seedlings for $.25 each and tomato for $.50 each.

Required:

1. Which vegetable should Gupta raise to earn the highest operating income for the year (cucumbers or tomatoes)?
2. Calculate the breakeven number of seedlings in sales dollars necessary to break even for both products (tomatoes and cucumbers.) (Hint: treat the heating and lighting costs as fixed costs.)
3. Assuming Gupta wants to earn a target profit of $50,000, how many cucumber or tomato seedlings must be sold?
4. Calculate the margin of safety in sales dollars for cucumbers and tomatoes.
5. Calculate operating leverage for the projected sales of cucumbers and tomatoes.
6. Gupta is considering the following alternatives to potentially improve profitability. Due to resource limitations, only one can be implemented.
   1. Purchasing a higher quality soil that will significantly improve the germination rates. The germination rates will increase to 40% for cucumbers and 25% for tomatoes. The new soil will have an added benefit of reducing watering costs and feeding by 50%. The soil will result in a one-time outlay at the beginning of the growing season of $10,000.
   2. Installing newer, more efficient equipment that will reduce heating and lighting costs by 50%. The new equipment will promote more stable growing conditions, increasing the germination rates of cucumbers to 35% percent and of tomato to 23%. The change in survival rates is not expected to increase feeding costs or watering costs. The new equipment will cost $3,000.

Should either of the alternative investments be undertaken, and if so, which vegetable should be raised?