Spring Creek Gardens (SCG) operates a commercial nursery where it propagates plants for garden centers throughout the region. SCG has $8,200,000 in assets. Its yearly fixed costs are $959,000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total $6.35. SCGs' sales volume is currently 770,000 units. Competitors offer the same plants, at the roughly the same quality, to garden centers for $8.75 each. Garden centers then mark them up to sell to the public for $14 to $18, depending on the type of plant.

The December 12th Management Meeting- The owners of SCG owners expressed in no uncertain terms that next year's profit must equal or exceed 12% of assets used in the operation. SCG has traditionally used a target costing strategy and the cost accountant at the meeting said that with the current cost structure, that the owner's profit goal will not be met. The production manager, along with an owner's daughter Ms. Iris Horticus, a horticulturist by training, said that they can cut the variable cost per unit by thirty cents ($0.30/unit reduction). The cost accountant agreed that this reduction was enough to meet the owner's policy of a return of 12% on assets utilized.

On January 3rd - A Management Reset Occurs -The owners 'fire' (i.e. the owners terminated the employment of) all the top managers stating "the old management team was too complacent in the past and never made a profit over the long-run."

The January 4th Ownership Meeting - The owners, promote Ms. Iris Horticus to be the new General Manager and instruct her to immediately start an aggressive advertising campaign strategy to differentiate SCG plants from those grown by other nurseries. (The cost accountant did remain employed at SCG.) The owners also stated that they do not expect the sales volume to be affected by the new advertising campaign. And they also said that the advertising budget for the campaign is $600,000 this year and that the variable costs of the propagated plants must continue to be $6.05 per unit.

Given these conditions, what will its cost-plus price be? Do you think SCG will be able to sell its plants to garden centers at the cost-plus price? Why or why not?

• For the December 12th meeting, confirm the cost accountant's conclusions. Show an analysis (your calculations) of target cost before and after the change in variable cost per unit.
• For the January 4th meeting, show an analysis of cost-based pricing that determines the selling price of each unit if the advertising campaign and variable cost of $6.05 per unit are used.
• Add other appendices and items if it makes a better response to the owners. Having a definitions page will help you achieve full points for this section.