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

QUESTION

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?

ANSWER:

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