Question

Nature's House operates a commercial plant nursery where it propagates plants for garden centers throughout the region.Nature's House has $5.8 million in assets. Its yearly fixed costs are $742,000​,and the variable costs for the potting​ soil, container,​ label, seedling, and labor for each​ gallon-sized plant total $1.55.Nature's House'svolume is currently 575,000 units. Competitors offer the same quality plants to garden centers for $3.80 each. Garden centers then mark them up to sell to the public for $8 to $9​,depending on the type of plant.

1.	Nature's House owners want to earn an 11​% return on the​ company's assets. What is Nature's House's target full​ cost?
2.	Given Nature's House's current​ costs, will its owners be able to achieve their target​ profit? Show your analysis.
3.	Assume that Nature's House has identified ways to cut its variable costs to $1.40 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.	Nature's House started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Nature's House ​doesn't expect volume to be​ affected, but it hopes to gain more control over pricing. If Nature's House has to spend $57,500 this year to advertise and its variable costs continue to be $1.40 per​ unit, what will its​ cost-plus price​ be? Do you think Nature's House will be able to sell its plants to garden centers at the​ cost-plus price? Why or why​ not?

Answer 1

Part-1
	Target full cost: The target cost of a product is the expected selling price of the product minus the desired profit from selling it. In other words, target cost is really a measure of how low costs need to be to make a certain profit.
	In this problem, we need to calculate the target full cost of Nature's House
i	Desired profit of the owner of Nature's House: 11% return on the company's assets
	Value of the asset of company	$	5,800,000
	desired profit % on the assets of company		11%
	hence desired profit =		638,000
ii	Expected selling price
	current volume of production	units	575,000
	current selling price per unit	$	3.80
	(as other competitors are selling their identical products to garden center at $ 3.80/- per unit, hence Nature's house can not take more than this
	Expected sale revenue	$	2,185,000
iii	Target full cost= Expected sale revenue-Desired profit
	Expected sale revenue	$	2,185,000
Less:	Desired profit	$	638,000
	Target full cost	$	1,547,000
	hence according to this calculation, we can say that $ 1,547,000/- is the target full cost of Nature's House to earn desired profit of $ 638,000/- i.e. 11% return on the company's assets.
Part-2	Analysis of current cost and desired profit
	Current total cost the Nature's House
i	Fixed cost	$	742,000
ii	Variable cost at the scale production of 575,000 units @ $ 1.55 per unit	$	891,250
	Total cost	$	1,633,250
Less:	Target full cost	$	1,547,000
	Difference	$	86,250
	Analysis: as per above calculation of current cost of $ 1,633,250/- in comparison of target full cost of $ 1,547,000/-, we can say that the owners of Nature's House will not be able to achieve their target profit.
Part-3	Analysis of new scenario of variable cost of $ 1.40 per unit
	New total cost the Nature's House
i	Fixed cost	$	742,000
ii	Variable cost at the scale production of 575,000 units @ $ 1.40 per unit	$	805,000
	Total cost	$	1,547,000
Less:	Target full cost	$	1,547,000
	Difference	$	-
	Analysis: as per above calculation of new total cost of $ 1,547,000/- in comparison of target full cost of $ 1,547,000/-, we can say that now the owners of Nature's House are able to achieve their target profit and there is no need to change in its target fixed cost.
Part-4	New cost-plus price when variable cost is $ 1.40/- unit
	New total cost the Nature's House
i	Fixed cost	$	742,000
ii	Variable cost at the scale production of 575,000 units @ $ 1.40 per unit	$	805,000
iii	Advertisement cost	$	57,500
	Total cost	$	1,604,500
Add:	Desired profit	$	638,000
	New desired sale revenue	$	2,242,500
	current volume of production	units	575,000
	New sale price/cost plus price	$	3.90
	Analysis of ability of Nature's House to sell its product to Garden center to its new sale price
i	Reason for abilility: if Nature's House via its advertisement is successful to impress the market for its product, its superior quality over the products of competitors etc, then it can sell its product at this increased sale price of $ 3.90/- per unit as the increase in price is only of $ .10 per unit which is very nominal in value and Garden center can purchase this product from Nature's Greens at this increased price as Garden center sells this product to ultimate customer at the very higher price of $8-9 per unit.
ii	Reason for non-ability: if the advertisement efforts of Nature's House does not effect the market in the positive or successful way, then there is no extra demand for the product of Nature's house as this is common product in the market well supplied by others vendors also.