Question

(L.OBJ. 2) Making special order and pricing decisions [15-20 min] Garden House operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Garden House has $5,000,000 in assets. Its yearly fixed costs are $625,000 and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total $1.70. Garden House's vol- ume is currently 500,000 units. Competitors offer the same plants, at the same qual- ity, to garden centers for $4.00 each. Garden centers then mark them up to sellto the public for $8 to $10, depending on the type of plant. ments Garden House's owners want to earn a 12% return on the company's assets. What is Garden House's target full cost? 1. get profit? Short-Term Busin Assume Garden House has identified ways to cut its variable costs to $1.55 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit? Garden House started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Monrovia Plants made this strategy work so Garden House has decided to try it, too. Garden House does not expect vol- ume to be affected, but it hopes to gain more control over pricing. If Garden House has to spend $120,000 this year to advertise, and its variable costs continue to be $1.55 per unit, what will its cost-plus price be? Do you think Garden House will be able to sell its plants to garden centers at the cost-plus price? Why or why not? 3. 4.

Answer 1

Calculation of target full cost Particulars Amount $2,000,000 (500,000 x $4) Revenue at market price ($5,000,000 x12%) | ($600,000) Less: Desired profit $1,400,000 Target full cost

Calculation of current cost: Particulars Amount Fixed cost $625,000 Add: Variable cost (500,000x$1.70) $850,000 $1,475,000 Total full cost 500,000 units Number of units S1,475,000 500,000 Units Cost per unit $2.95

$2.95 Cost per unit -12 Profit per urut at 12%(500,000) Selling price (Cost+ Profit) $2.95$1.2 $4.15 Selling price per unit

If the garden house sells the plant @4.15 per unit, it will earn the desired profit of 12% on

investment and if it sells below the 4.15 it will not get its desired profit.

Calculation of new target full cost: Particulars Amount New target fixed cost $625,000 Add: Variable cost (500,000 × $1.55) | $775,000 $1,400,000 New target full cost Number of units 500,000 units S1,400,000 500,000 Units Cost per unit

$2.8 $2.8 Cost per unit Pott per unit at 12%('00,000) |$12 Profit per unit at 12% $1.2 500,000 $2.8+S1.2 Selling price (Cost+ Profit) S4 Selling price per unit

The garden house will be able to meet the expectation of the shareholder if they get reduction in the variable cost because they it will incur per unit is $2.8 and profit per unit is $1.2, hence it will be able to meet the shareholders expectation and to get the target profit

Calculation of cost plus price: Particulars Amount

fixed cost $625,000 Add: Variable cost 500,000 x $1.55 $775,000 $1,400,000 Add: Additional cost of advertising $120,000 New target full cost $1,520,000 Add: Desired profit ($5,000,000 x 12%) $600,000 Target revenue $2,120,000 Number of units 500,000 units Cost per unit

$2,120,000 500,000 Units Selling price per unit $4.24

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Garden house will not be able to sell the plants to garden at cost plus pricing because the competitor are selling at $4 per unit hence the clients would turn towards the competitors and if garden house sells @ $4 then they will not get the desired of 12% on their investments