Question

A Requirements 1. Garden Away owners want to earn a 12% return on the company's assets. What is Garden Away's target full cost? 2. Given Garden Away's current costs, will its owners be able to achieve their target profit? Show your analysis. 3. Assume that Garden Away 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. Garden Away started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Garden Away doesn't expect volume to be affected, but it hopes to gain more control over pricing. If Garden Away 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 Garden Away will be able to sell its plants to garden centers at the cost-plus price? Why or why not?

Answer 1

Answer 1

Sale Revenue @ 3.50 per unit	1750000
Less: Target Return	600000
Target Full Cost	1150000

Answer 2

Variable Cost @ 1.25 per unit	625000
Add: Fixed Cost	600000
Total Full Cost	1225000

Garden Away's Current total full cost of $1225000 is higher that its target full cost. Garden away does not meet the owner's profit expectations.

Answer 3

Taget Full Cost	1150000
Less: Reduced Level of Fixed Cost @ 1.10 per unit	550000
New Target Fixed Cost	600000

The new target fixed cost is $600000. By reducing variable cost to $1.10, Garden away is able to achieve its target profit without having to take any other cost cutting measures.

Answer 4

Variable Cost @ 1.10	550000
Fixed Cost	600000
Additional Advertising Expense	100000
Total Cost	1250000
Target Return	600000
Target Revenue	1850000
Divided By:Number of Units to be sold	500000
Cost plus price per unit	3.7