Question 1 - Panda Flowers

Panda 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 of Kenya.

-From Panda Flowers' website (http://pandaflowers.net/aboutus.html)

For the current year, Panda Flowers plans to plant one hectare of newly developed land with carnations. 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 Panda expects to be able to charge $1.00 per stem.However, their customers will only pay for stems received 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 and shipping, 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 and equipment.

3. What is the minimum amount of automation (expressed in the reduction of variable cost per stem) that Panda Flowers must adopt in order to break even? Assume full production of 50,000 stems.

4. A large uncertainty about Panda Flowers' plan is the future demand for carnations. Assume that they cannot grow other flowers on the same plot of land, at least in the short term. Do you think that the automation plan makes the risk of future demand fluctuations more or less of a concern? Explain briefly, using the concept of operating leverage. No numbers are necessary!