P20-22A
Making Special Order and Pricing Decisions
P20-22A Green
Thumb operates a commercial plant nursery where it propagates plants for garden
centers throughout the region. Green Thumb has $ 4,800,000 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 $ 1.35.
Green Thumb’s volume is currently 470,000 units. Competitors offer the same
plants, at the same quality, to garden centers for $ 3.60 each. Garden centers
then mark them up to sell to the public for $ 9 to $ 12, depending on the type
of plant.
Requirements
1. Green Thumb’s owners want to earn a 10% return on investment on the company’s assets. What is Green Thumb’s target full product cost?
1. Green Thumb’s owners want to earn a 10% return on investment on the company’s assets. What is Green Thumb’s target full product cost?
2. Given
Green Thumb’s current costs, will its owners be able to achieve their target
profit?
3. Assume
Green Thumb has identified ways to cut its variable costs to $ 1.20 per unit.
What is its new target fixed cost? Will this decrease in variable costs allow
the company to achieve its target profit?
4. Green Thumb started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Monrovia Plants made this strategy work, so Green Thumb has decided to try it, too. Green Thumb does not expect volume to be affected, but it hopes to gain more control over pricing. If Green Thumb has to spend $ 115,000 this year to advertise and its variable costs continue to be $ 1.20 per unit, what will its cost- plus price be? Do you think Green Thumb will be able to sell its plants to garden centers at the cost- plus price? Why or why not?
4. Green Thumb started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Monrovia Plants made this strategy work, so Green Thumb has decided to try it, too. Green Thumb does not expect volume to be affected, but it hopes to gain more control over pricing. If Green Thumb has to spend $ 115,000 this year to advertise and its variable costs continue to be $ 1.20 per unit, what will its cost- plus price be? Do you think Green Thumb will be able to sell its plants to garden centers at the cost- plus price? Why or why not?
TUTORIAL PREVIEW
Req. 1
Green Thumb’s target full cost is $1,212,000.
|
Revenue at current market price
(470,000 units × $3.60
per unit
|
$1,692,000
|
|
Desired profit ($4,800,000 × 10%)
|
(480,000)
|
|
Target full cost
|
$1,212,000
|
File name: P20-22A Green Thumb.doc File type: .doc PRICE: $9
