Question

Snappy Plants operates a commercial plant nursery where it propagates plants for garden centers throughout the region. Snappy Plants 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 \(1.90. Snappy Plants’s volume is currently 500,000 units. Competitors offer the same plants, at the same quality, to garden centers for \)4.25 each. Garden centers then mark them up to sell to the public for \(9 to \)12, depending on the type of plant.

Requirements

1. Snappy Plants’s owners want to earn a 11% return on investment on the company’s assets. What is Snappy Plants’s target full product cost?

2. Given Snappy Plants’s current costs, will its owners be able to achieve their target profit?

3. Assume Snappy Plants 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?

4. Snappy Plants started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Snappy Plants does not expect volume to be affected, but it hopes to gain more control over pricing. If Snappy Plants has to spend \)105,000 this year to advertise and its variable costs continue to be $1.75 per unit, what will its cost-plus price be? Do you think Snappy Plants will be able to sell its plants to garden centers at the cost-plus price? Why or why not?

Short answer

The target full product cost for the company is$1,564,000.

Step-by-step solution

Meaning of Desired Profit

In a managerial accounting branch, business entities use the term “desired profit” to demonstrate the target profits they require to achieve by the end of aspecified period.

Computation of target full cost  

Particulars	Amount ($)
Revenue at current market price (4.25*500000)	2,125,000
Less: Desired profit (11%*5,100,000)	(561,000)
Target full cost	1,564,000

Analysis of the achievement of target profit

Particulars	Amount ($)
Fixed costs	650,000
Add: Variable costs (500000*1.9)	950,000
Total cost	1,600,000

Comment:

Based on the analysis above, owners will not be able to achieve theirtarget profit because the current cost of the company is more than its target cost.

Computation of cost cutting and achievement of profit 

Particulars	Amount ($)
Fixed costs	650,000
Variable costs (500000*1.75)	875,000
Total cost	1,525,000

Comment:

As the new cost of 1,525,000 is lower than the target cost of 1,564,000,it will allow the company to achieve its target profit.

Computation of cost-plus price

Particulars	Amount ($)
Fixed costs	650,000
Advertising costs	105,000
Variable costs (500000*1.75)	875,000
Total costs	1,630,000
Add: Desired profit (5100000*11%)	561,000
Sales value	2,191,000
Divide: Number of units	500,000
Cost-plus price	4.382

Comment:

Based on the analysis above, the company may sell its plants at higher prices than usual market rates, because by adding advertising costs, the company has control over the pricing.