ABC Gardening operates a commercial plant nursery where it propagates plants for garden centers throughout the region. ABC Gardening has $ 3.5 million in assets. Its yearly fixed costs are $ 470 comma 000, and the variable costs for the potting soil, container, label, seedling, and labor for each gallon-sized plant total $ 1.60. ABC Gardening's volume is currently 500 comma 000 units. Competitors offer the same quality plants to garden centers for $ 3.30 each. Garden centers then mark them up to sell to the public for $ 8 to $ 9, depending on the type of plant. Requirement 1. Nature Place owners want to earn a 10% return on the company's assets. What is Nature Place's target full cost? Calculate the target full cost for Nature Place. Select the formula labels and enter the amounts. Less: Target full cost.
Requirement 2. Given Nature Place's current costs, will its owners be able to achieve their target profit? Calculate Nature Place's current total full cost.
Requirement 3. Assume that Nature Place has identified ways to cut its variable costs to $1.50 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the company to achieve its target profit?
Requirement 4. Nature Place started an aggressive advertising campaign strategy to differentiate its plants from those grown by other nurseries. Nature Place doesn't expect volume to be affected, but it hopes to gain more control over pricing. If Nature Place has to spend $94,000 this year to advertise and its variable costs continue to be $1.50 per unit, what will its cost-plus price be? Do you think Nature Place will be able to sell its plants to garden centers at the cost-plus price? Why or why not? Determine its cost-plus price.

ABC Gardening / Nature Place

1. Nature Place's target full cost, with return on assets = 10%

Sales revenue =                  $1,650,000 (500,000 x $3.30)

Expected Return on Asset = $350,000 ($3.5 million x 10%)

Target full cost =                $1,300,000

Fixed cost =      $470,000

Variable cost = $830,000 ($1.66 x 500,000)

2. Nature Place's current total full costs; will its owners achieve their target profit:

Sales revenue =         $1,650,000 (500,000 x $3.30)

Current full costs:

Variable cost = $800,000 (500,000 x $1.60)

Fixed costs =    $470,000

Current full costs =    $1,270,000

Current profit =            $380,000

Target profit =              $350,000

Excess over target =      $30,000

The owners will achieve target profit and make an excess of $30,000

3. With variable costs cut to $1.50 per unit, New target fixed cost.  Will it achieve its target profit?

Sales revenue =       $1,650,000 (500,000 x $3.30)

Variable costs =         $750,000 (500,000 x $1.50)

Annual Fixed costs = $470,000

Profit =                        $430,000

It will exceed its target profit of $350,000 by $80,000.

4.Advertising cost of $94,000 with variable costs of $1.50 per unit, cost-plus price:

Variable costs =         $750,000 (500,000 x $1.50)

Annual Fixed costs = $564,000 ($470,000 + 94,000)

Total cost =                $1,314,000

Cost plus =                $1,664,000 ($1,314,000 + $350,000)

Cost plus price =      $3.33 ($1,664,000/500,000)

Do you think Nature Place will be able to sell its plants to garden centers at the cost-plus price?

It will not be able to sell to garden centers at the cost-plus price.

Why or why not?

The garden centers currently buy at $3.30, a little less than its cost-plus price with advertising cost of $94,000.  It will be losing $15,000 if it sells its products to garden centers at their current buying price.

Explanation:

a) Data:

Assets = $3.5 million

Target profit on assets = $350,000 = ($3.5 million x 10%)

Annual Fixed costs = $470,000

Variable costs = $1.60

Volume = 500,000

Competitors price to garden centers = $3.30 each

Selling price to the public = $8 to $9

Total costs and Profit:

Sales revenue =       $1,650,000 (500,000 x $3.30)

Variable costs =         $800,000 (500,000 x $1.60)

Annual Fixed costs = $470,000

Profit =                        $380,000

b) In target profit costing, the starting point for calculating costs is the selling price and the target profit.  When the profit is deducted from the selling price, a full cost per unit is determined.  This determined figure will be the ceiling for costs.  Any overrun negatively affects the target profit.  Instead of overrunning the target cost, management must work toward a full cost that is less than the established target cost.

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