BGCSE Horticulture 1257: Enterprise Budget and Marketing Decision for a Horticultural Nursery

A nursery owner produces 10,000 potted herb plants per year, selling them at $5 each. The variable costs per plant are: pot and soil $0.50, seed or cuttings $0.20, fertilizer and pesticide $0.30, labor $1.00, and packaging $0.10. Fixed costs per year are: greenhouse depreciation $5,000, insurance $1,000, property tax $2,000, and utilities $3,000. The owner sells mainly to local garden centers, which take 60% of the plants at $4 each, and the remainder at farmers' markets at $5 each. The owner is considering expanding production to 15,000 plants by investing in a new greenhouse that would increase fixed costs by $10,000 per year and variable costs by $0.10 per plant due to increased labor efficiency. The market demand at $5 is estimated to be 12,000 plants, and at $4, 15,000 plants. The owner wants to increase profit and is also considering reducing the price to $4.50 to attract more customers. The nursery has a capacity of 12,000 plants currently.

Expansion option: New fixed costs = $11,000 + $10,000 = $21,000. New variable cost per plant = $2.10 + $0.10 = $2.20? Wait, the problem says variable costs increase by $0.10 per plant due to increased labor efficiency? Actually, it says 'increase fixed costs by $10,000 per year and variable costs by $0.10 per plant due to increased labor efficiency.' That seems contradictory: increased labor efficiency should decrease variable costs, but it says increase. I'll interpret as variable costs increase by $0.10 per plant (maybe due to more inputs). So new variable cost = $2.20. Capacity becomes 15,000. Market demand at $5 is 12,000, at $4 is 15,000. Currently, the nursery sells 6,000 at $4 and 4,000 at $5. If expand, they could sell more at $4? But they need to sell all 15,000. At $4, demand is 15,000, so they could sell all at $4. Revenue = 15,000 * $4 = $60,000. Variable cost = 15,000 * $2.20 = $33,000. Fixed = $21,000. Total cost = $54,000. Profit = $6,000. That's lower than current $12,000. If they sell at $5, demand is 12,000, so they could sell 12,000 at $5 = $60,000, and remaining 3,000 at $4? But demand at $5 is 12,000, so they can sell 12,000 at $5. Revenue = 12,000*$5 + 3,000*$4 = $60,000 + $12,000 = $72,000. Variable cost = 15,000*$2.20 = $33,000. Fixed = $21,000. Total cost = $54,000. Profit = $18,000. That's better. But can they sell 12,000 at $5? The market demand at $5 is 12,000, so yes, if they can capture the whole market. But currently they only sell 4,000 at $5. So it's risky. Alternatively, price reduction: reduce price to $4.50. Current capacity 12,000. At $4.50, demand? Not given. We need to estimate. The problem gives demand at $5 and $4. Assume linear demand: at $5, demand 12,000; at $4, demand 15,000. Slope = (15,000-12,000)/(4-5) = -3,000 per dollar. At $4.50, demand = 12,000 + (5-4.50)3,000 = 12,000 + 1,500 = 13,500. But capacity is 12,000, so they can sell at most 12,000. If they sell all 12,000 at $4.50, revenue = $54,000. Variable cost = 12,000$2.10 = $25,200. Fixed = $11,000. Total cost = $36,200. Profit = $17,800. That's higher than current $12,000. But they need to sell all at $4.50; currently they sell some at $4 and some at $5. If they lower price to $4.50, they might lose the $5 market? Actually, if they set a single price of $4.50, they could sell to garden centers and farmers' market at $4.50. But garden centers currently pay $4; they might not pay $4.50. So this is uncertain. A better analysis: compare profit under different scenarios. Expansion with mixed sales: sell 12,000 at $5 and 3,000 at $4 gives profit $18,000. But is that realistic? They need to find buyers for 12,000 at $5, which is the total market demand at that price. They would have to capture the entire market, which may not be possible. If they only sell 6,000 at $4 and 6,000 at $5 (total 12,000), profit = revenue $54,000 - variable $26,400 - fixed $21,000 = $6,600. That's lower. So expansion is risky. Price reduction to $4.50 with current capacity: if they can sell 12,000 at $4.50, profit $17,800, which is better than current. But they must ensure demand. Since current sales are 10,000, increasing to 12,000 at $4.50 might be feasible if demand is elastic. The break-even for price reduction: fixed $11,000, contribution per unit = $4.50 - $2.10 = $2.40. Break-even = 4,583 plants. So selling 12,000 gives profit $17,800. This seems more viable with lower risk. However, the expansion could be more profitable if they can sell at higher prices. But given the market demand constraints, the price reduction seems safer. I recommend the price reduction if demand can be generated, but also consider a combination: expand slightly and keep price. A detailed analysis shows that the expansion requires selling at least 12,000 at $5 to be profitable, which is uncertain. Therefore, the price reduction is more financially viable with less risk.

Enterprise Budget and Marketing Decision for a Horticultural Nursery

Enterprise Budget and Marketing Decision for a Horticultural Nursery

1. Calculate the current annual profit and break-even quantity. Show your calculations.

2. Evaluate the expansion option (to 15,000 plants) and the price reduction option (to $4.50). Which is more financially viable? Consider market demand and capacity.