Green Thumb operates a commercial plant nursery where it propagates plants for garden centers throughout the region.

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?

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?

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

Req. 2

Green Thumb’s actual total full costs of $ 1,234,500 are higher than its target full cost; therefore, Green Thumb will not meet the stockholders’ profit expectations.

Current variable cost (470,000 × 1.35)	$ 634,500
Current fixed costs	600,000
Total full cost.	$1,234,500

Req. 3

The new target fixed cost is $648,000

Target full cost (from requirement 1)	$1,212,000
Reduced level of variable costs (470,000 × $1.20)	(564,000)
New target fixed costs.	$ 648,000

Since the company’s actual fixed costs are less than or equal to the new target fixed cost amount, Green Thumb will be able to achieve its target profit without having to take any other cost cutting measures.

Req. 4

Green Thumb’s cost-plus price is $3.74 .

Current fixed costs	$ 600,000
Plus: Additional fixed costs of advertising	115,000
Plus: Total variable costs (470,000 × $1.20)	564,000
Total full cost	$1,279,000
Plus: Desired profit ($4,800,000 × 10%)	480,000
Desired revenue	$1,750,000
Divided by: Number of units	÷ 470,000
Cost-plus price per unit	$ 3.74

Retailers will be more willing to pay the cost-plus price if the marketing campaign is effective . Otherwise, Green Thumb may be considered a generic nursery.