Green House operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Green House 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 $1.90.
Green House's volume is currently 500,000 units. Competitors offer the same plants, at the same quality, to garden centers for $4.25 each. Garden centers then mark them up to sell to the public for $9 to $12, depending on the type of plant. Read the requirements
Requirement 1.
Green House's owners want to earn an 11% return on investment on the company's assets. What is
Green House's target full product cost?
Revenue at current market price ?
Less:Desired profit ?
Target full product cost ?
Requirement 2. Given Green House's current costs, will its owners be able to achieve their target profit? Begin by calculating Green House's current full product cost.
Current variable costs ?
Plus:Current fixed costs ?
Current full product cost ?
Requirement 3. Assume Green House has identified ways to cut its variable costs to $1.75 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?Begin by calculating Green House's new target fixed cost.
Target full product cost ?
Less:Variable costs ?
Target fixed cost ?
Requirement 4.
Green House started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries.
Green House does not expect volume to be affected, but it hopes to gain more control over pricing. If Green House has to spend $145,000 this year to advertise and its variable costs continue to be $1.75 per unit, what will its cost-plus price be?
Begin by calculating the cost-plus price per unit. (Round your answer to the nearest cent.)
Current variable costs ?
Plus:Fixed costs ?
Full product cost ?
Plus:Desired profit ?
Target revenue ?
Divided by:Number of units ?
Cost-plus price per unit ?

1. Revenue at current market price    $2,125,000 (500,000 units * $4.25)

    Less: Desired profit                         $561,000 ($51,000,000 * 11%)  

   Target full product cost                   $1,564,000

2. Current variable costs             $950,000 (500,000 units * $1.90)

   Add: Current fixed costs        $650,000

   Current full product cost        $1,600,000

No, the owner will not be able to meet its desired profits because the above product cost is still more than target cost of $ 1,564,000

3. Target full product cost            $1,564,000

    Less:  Variable costs                  $875,000 (1.75*500,000 units)

    Target fixed cost                       $689,000

Yes, now the company will be able to meet its target profit because the target Fixed cost calculated above is MORE than actual Fixed Cost of $ 650,000

4. Current variable costs        $875,000

   Add: Fixed costs                 $795,000

      ($650,000 + $145,000)

   Full product cost                  $1,670,000

   Add: Desired profit               $561,000

   ($51,000,000 x 11%)

   Target revenue                      $2,231,000

Cost-plus price per unit  = Target revenue / Number of units

Cost-plus price per unit  = $2,231,000 / 500,000 units

Cost-plus price per unit  = $4.46

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.

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