Question

Hana Ltd. is a producer and importer of freshly cut flowers based in the country side village of Tagus. It has made a name for from its gerberas, roses, carnations, and tulips, although the portfolio includes a

range of itself other products. Tulips and some special flowers are imported from the Netherlands. Products are sold at its premises to florists, in the trade market to wholesalers and retailers, and directly to a large retail chain. The market for fresh flowers is very competitive, with significant pressure over prices. There is

high seasonality in supply (e.g. spring and early summer) and demand (e.g. Valentine’s Day, Mother’s Day, Christmas). When there is a significant mismatch between those supply and demand, prices can fluctuate widely, from ‘rock bottom’ prices that do not cover production costs to ‘sky high’ prices that make very generous profit margins. In addition to price, the market values highly product freshness, reliability of supply, speed of delivery, and range products available (including color variations).

The company owns part of its productive land and part of it is on a long-term land lease. All production of flowers is carried out in a series of greenhouses that Hana built and fully owns. Flower production facilities (greenhouses) are fitted with temperature and humidity control equipment that automatically opens the greenhouses to air circulation when temperature is too high and heats it up when the temperature is too low. The company uses its own two tractors to plough the land and to haul

trailers. The trailers carry fertilizers, seedlings for planting, and occasionally pesticides to the greenhouses. The plants, seedlings, shrubs, and bulbs planted by Hana are mostly imported to ensure the highest quality, productivity, and diversity of color variations. The trailers also carry freshly cut flowers back from the greenhouses to the processing and packing facility (as well as the green waste that is sent to a local dump). After processing and packaging, products are kept in one of three refrigeration units to prolong the life of flowers.

1

Hana currently employs 70 full-time staff, which represents the double of its size just four years ago. The company’s manager and founder, Mr Ting Tong, is an entrepreneur with twenty years of work experience in the sector but no training in management. He is directly assisted by his wife, Mrs Ming Tong, who manages the sales office and inventories. Like her husband, she has no formal training in management, but she is extremely energetic and outstanding in dealing with customers, a true asset to the company. Hana has a dedicated team of three salespersons working in the office at its premises, one accountant, two distribution employees, one foreman and one forewoman. The remaining employees work in the production, processing, and packaging of flowers, making flower production a labor- intensive activity. During peak times of production, part-time employees are hired on a need basis and on-going staff is paid for overtime work. All of the company’s employees are paid a fixed salary, plus any extras from overtime work.

The main building where the company operates houses the all administrative staff, the sales office, a product display area, the processing and packaging facility, and the refrigeration units. Workers are moved to and from the company’s main building, as well as between greenhouses, using two fully owned mini-vans. The company also uses its own fleet of three trucks (with cooling) to distribute products to customers and to take production to the trade market.

The company’s growth has created difficulties to Mr Tong in ensuring the timely payments to employees and suppliers. He is also finding a bit overwhelming to have a feel for how the company is doing, now that the scale of operations has grown to an unprecedented level. At the moment, there is no formal planning in the company; only rough estimates of revenues and the main cost items are prepared by Mr T o n g in his paper notebook. The company’s accountant role has been that of dealing with financial accounting matters and ensuring the company meets its legal tax obligations.

Another issue that Hana currently faces is the management of sales of products in short supply. These products cannot be sold to the first customer that comes through the door, but rather they need to be meticulously managed so that the orders from regular customers can be at least partially satisfied. Mrs Tong noted that the salespersons, who have been informally assigned to specific customers, frequently lacked an appreciation for this issue in their eagerness to meet their assigned customer’s requirements. No doubt Hana wanted a proactive sales team, but the sales push needed to be directed to products in good supply, not for those that can “sell for themselves”.

Required:

Using the detail in the case, describe how your chosen method of calculating product cost will be beneficial within HanaLtd.and have relevance to management.

Answer 1

Product cost refers to all those costs which are incurred by the company in order to create the product of the company or deliver the services to the customers and the same is shown in the financial statement of the company for the period in which they become the part of the cost of the goods that are sold by the company.

main expences of product cost are:

material

labour

factory overheads for e.g electricity expences,depreciation and insurance cost etc.

better To calculate this cost per unit as it can help decide the appropriate sales price of the finished product. To determine this cost on a per unit basis, just divide this cost as calculated above by the number of units produced.

The sales price must be equal to or greater than the product cost per unit to avoid losses. If the sale price is equal, then it is a break-even situation, i.e., no profit, no loss, and the sales price are just covering the cost per unit.

but overall we will suggest the company should hire a management team that can handle the work in managed way,issues can only be then resolved,if the supply is less and demand is more then they should supply it partiaklly so that everyone can have the product.sales persons should be more eager to help the customers and supply the goods at right time.

the company knows very well that during festive season alentine’s Day, Mother’s Day, Christmas the demand is highest so they should plan in advance as to increase the supply during this time,and they should do overtime to meet the increasing demand.as product that hana ltd is selling is very perishable so they also cant store too much.

MR.Tong should hire the accountants who can keep a proper record of revenues and cost.then only the problem will be solved