# Sonika Paper 1.doc - Question 1 - Panda Flowers Panda...

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Question 1 - Panda FlowersPanda Flowers is developing 50 Hectares of Green Houses for Roses using Spanish Technology.40 Hectares are already producing Roses which are exported to USA.Panda Flowers is situated in the Flower Business about 100 Km from Nairobi, the capital ofKenya.-From Panda Flowers’ website ()For the current year, Panda Flowers plans to plant one hectare of newly developed land withcarnations.Like the roses being currently produced, the carnations will be exported to the USA.The one-hectare plot is expected to be able to produce up to 50,000 stems per year, and Pandaexpects to be able to charge \$1.00 per stem.However, their customers will only pay for stemsreceived in good condition, and based on past experience, Panda will sell (and thus be paid for)only 8 stems out of every 10 which are produced and shipped.Under their current growing practices, Panda expects to have a variable cost (mostly labor andshipping, but also materials such as bulbs, pots, fertilizer, etc) of \$0.60 per stem produced.Fixed costs will be approximately \$12,000 per year, and is mostly the cost of the land andequipment.Required:1.What is Panda’s breakeven point for carnations under current growing practices (in number ofstems produced per year)?Hint: it is more than their current production capacity.One reason the initial plan (in part 1) is not feasible is that production is highly labor-intensive.Panda Flowers is considering an increase in automation to lower their variable labor costs,although this will also increase fixed costs (for example, by increasing rent and/or depreciation).Specifically, assume that for any reduction in variable cost per stem, there will be a 10,000 timesgreater increase in fixed costs per year.In addition, the reduction of variable cost is limited to amaximum of \$0.10 per stem - i.e., from \$0.60 per stem down to \$0.50 per stem.Furtherreduction below that is not possible regardless of the increase in fixed costs.For example, to decrease variable costs by \$0.10, the largest possible reduction, fixed costs willincrease by \$1,000 (10,000x\$0.10).To decrease variable costs by a tenth of a cent (\$0.001),fixed costs will increase by \$10 (10,000x\$0.001).
2.Assuming full production (50,000 stems) how much profit will Panda Flowers earn if it adoptsthe maximum amount of automation – this is, if it reduces variable costs by the full \$0.10 perstem?

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