Reference no: EM131211116
Making pricing decisions
Outdoors Place operates a commercial plant nursery, where it propagates plants for garden centers throughout the region. Outdoors Place has $5,100,000 in assets. Its annual 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. Outdoors Place 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) Outdoors Place owners want to earn an 11% return on the company’s assets. What is their target full product cost?
2) Given Outdoor Place’s current costs, will its owners be able to achieve their target profit?
3) Assume Outdoors 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 to company to achieve its target profit?
4) Outdoors Place started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Greenery Plants made this strategy work, so Outdoors Place has decided to try it, too. Outdoors Place does not expect volume to be affected, but hopes to gain more control over pricing. If Outdoors 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 Outdoors Place will be able to sell its plants to garden centers at the cost-plus
price? Why or why not?
Answer without using excel, I prefer Word.
SHOW WORK / explain
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