Question

Question 2: Nature Place operates a commercial plant nursery, where it propagates plants for garden centers throughout the region. Nature Place has $5,100.000 in assets. Its yearly fixed costs are $600.000 and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total $1.25. Nature Place's volume is currently 500,000 units. Competitors offer the same plants, at the same quality, to garden centers for $3.50 each. Garden centers then mark them up to sell to the public for $9 to $12. depending on the type of plant. Requirements 1. Nature Place's owners want to earn a 11% return on the company's assets. What is Nature Place's target full product cost? 2. Given Nature Place's current costs, will its owners be able to achieve their target profit? 3. Assume Nature Place 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? 4. Nature Place started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries, Monrovia Piants made this strategy work so Nature Place has decided to try it, too. Nature Place does not expect volume to be affected, but it hopes to gain more control over pricing. If Nature Place has to spend $80.000 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 Nature Place will be able to sell its plants to garden centers at the cost-plus price? Why or why not?

Answer 1

Page: No ① Ansoor 0 Terziget Luld cost Revenue at moorket porice = 500,000 unito x $3.50 = $1450000 @ Desired profit - $5100,000 X 11'% = $561000 Targel- full corte 1450000 – 561000 = $1189000 Target full coat = $1199000 cool please pay out Variable corof 500,000 x $1.05 $625000 fized corf = $ 600,000 Total full cost = 625000 + 600,000 = $1225000 :.

Page No D No.of units = 500,000 full product corot per units 1225000 500,000 $2.75 11% profit 561000 duro 500,000 Epla Cost plus price per unit = 2.75 +1.12 = $3187 E.coop plus price per cinit = 83-87 . Nature place are selling them at $3.84 each. In this cost plus price per onit is higher than market porice $3.50. Therefore, it will probably not achieve the target ☺.co slus petice poco unit Veroniable cost a 500,000 x $ 1.1 O perunit :=$550,000

500,000 Page.avo fixed cost = $600,000 Total full cosf 550.000 + 600,000 - $1150,000 full gooluck comf per unit = 1150,000 - $2.30 1!! Profit. a $1.12 Cost plus price per unit = 2:30+ 1.12 = $ 3.42 li. cost plus price per unit = $3.42 In this case the cost plus price per unit is less than the market price of $3.50 1. In this Nature place is only able to cut variable cost not fixed cost. It is same as $600,000 ©. If Naline place decided to spend +80,000, Variable coof continues to $ 1.10 per unit

Page. No 4 Variable coof a 500,000 x $1.10 z $ 550,000 fixed cost = $600,000 Advertising cool - $ 80,000 Total ball cosf = 550,000 + 600,000 + 80,000 $1230,000 Full product cost per onit = 1230,000 500,000 . = 2.46 11% Profit = $1.18 coof plus price per unit = 2.464 1012 = $3.58 cost plus price per unit - $3:58 This new cost plus price per unito is higher than the market price $3.50, . :: Natiune place will not able to sell its plant to garden center at that price. Theretor," the nature place will not be able to sell its plant to garden the cost & cost plus mode dhe adinek