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 $650,000 and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-size plant total $1.40. Nature Place’s volume is currently 480,000 units. Competitors offer the same plants, at the same quality, to garden centers for $3.75 each. Garden centers then mark them up to sell to the public for $7 to $10, 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 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 $1.25 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 Plants 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 $125,000 this year to advertise, and its variable costs continue to be $1.25 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?