ACC312 Accounting Case study

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Harvard Business Case Study
ACC 312
Fall 2023
Scenic floral: Go North
Question 1: Try calculating a sales break-even point for scenic flowers. How many cases per week
would Scenic have to sell per store to break even? Use the financial information provided in the case
to calculate the breakeven.
Terrific Tennis Balls
Question 1: Calculate a list of the expenses, revenue, liability, or anything explained in the
paragraphs that are not included in the financial statement and need to be adjusted.
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TERRIFIC TENNIS BALLS: A MANUFACTURING INVENTORIES
EXERCISE
Raphael Bender Bennett wrote this exercise under the supervision of Ian Dunn solely to provide material for class discussion. The
authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised
certain names and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveypublishing.ca. Our goal is to publish
materials of the highest quality; submit any errata to publishcases@ivey.ca. i1v2e5y5pubs
Copyright © 2022, Ivey Business School Foundation
Version: 2023-03-03
It was January 7, 2021, and Serena Nadal, owner of Terrific Tennis Balls Inc. (TTB), was reviewing the
company’s financial performance for its third fiscal year. To update the accounting records, Nadal gathered
TTB’s fiscal 2019 balance sheet (see Exhibit 1) and the bookkeeper’s list of cash receipts and disbursements
for fiscal 2020 (see Exhibit 2). The bookkeeper had already recorded the fiscal 2020 cash transactions but
may have done so incorrectly. Nadal recorded the opening balances, cash receipts, and cash disbursements
to calculate the unadjusted trial balances for fiscal 2020 (see Exhibit 3). Nadal started with the bookkeeper’s
unadjusted trial balances and planned to use the balance sheet and the list of cash receipts and
disbursements, if necessary. She would have to figure out where the bookkeeper had posted each entry,
determine whether an entry required an adjustment, and adjust accordingly.
TERRIFIC TENNIS BALLS INC.
TTB was a tennis ball manufacturer located in London, Ontario. TTB sold tennis ball cans directly to its
end consumers through its retail store and e-commerce platform and to sporting goods shops across Ontario.
In fiscal 2020, TTB sold a total of 33,120 tennis ball cans. Sporting goods shops purchased tennis ball cans
for the wholesale price of CA$101 plus tax in fiscal 2020, and these purchases accounted for half of total
unit sales. Sporting goods shop customers always paid on account with credit terms of nine days following
the end of the month. End consumers purchased tennis ball cans at TTB’s retail store or online for $12 plus
tax in fiscal 2020 and always paid with cash at the time of purchase. All sales, regardless of payment
method, were subject to 13 per cent harmonized sales tax (HST) on the net invoice price. TTB had yet to
record sales taxes for the credit sales at fiscal year-end. The bookkeeper had recorded the sales taxes on
cash sales and the payment of all sales tax remittances for cash sales and cash collections. There were no
finished goods in transit at fiscal year-end.
THE MANUFACTURING PROCESS
TTB manufactured some of the highest quality tennis balls that Nadal had ever used. The first step in the
production process was to measure the rubber that would make the tennis ball core. The rubber was then
forced between two large pieces of machinery to produce a half shell. After the half shells were produced,
1
All dollar amounts are in Canadian dollars.
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Page 2
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intense heat was applied in order to bond the two shells together to form a ball shape. Just before the ball
was formed, pressurized air was inserted into the balls to ensure they had the proper level of pressure. The
completed rubber spheres were then covered in felt to ensure they would have the correct amount of bounce.
Finally, the balls were placed in a labelled can. One can contained three tennis balls. Whereas direct labour
and raw materials were introduced at the beginning and end of the manufacturing process, machine hours
were considered to be most evenly distributed. During fiscal 2020, 3,571 machine hours were required to
manufacture 36,000 completed cans.
LONG-LIVED ASSETS
Upon incorporation, TTB purchased the land and building for its production facility and administrative
space. The building was 2,500 square feet2 in total and was depreciated using the straight-line method.3 The
administrative office used 200 square feet of space, the finished goods storage used 175 square feet of
space, and the remainder of the building was used for production. On April 15, 2020, TTB received a
property tax bill for fiscal 2020. TTB was charged $3 of property tax per $100 of the historical cost of the
building. Nadal paid the property tax bill on May 1, 2020.
TTB also rented a small downtown retail location to sell its tennis balls to end customers. Upon signing the
one-year rental agreement on May 1, 2018, a deposit for the last month’s rent had been paid. Nadal had
renewed the rental agreement in 2019. In fiscal 2020, Nadal made the difficult decision to sell TTB’s
products exclusively online in response to the COVID-19 pandemic and so terminated the rental agreement
on April 30, 2020.
On January 1, 2020, TTB purchased a van for $15,000 cash. The van was used to deliver finished goods to
customers. The van would be depreciated using the straight-line method. The van had a useful life of five
years and no residual value.
All other long-lived assets on the fiscal 2019 balance sheet had been purchased on the date of incorporation
and were depreciated using the straight-line method. No repairs, impairments, or changes to the residual
value had occurred since the assets were purchased.
HUMAN RESOURCES
Nadal hired a part-time delivery driver to operate the delivery van. The delivery driver was paid $15.00 per
hour and had been paid for a total of 300 hours by the end of fiscal 2020. The driver was paid on the last
day of the month for that month’s work.
In fiscal 2020, Nadal worked a total of 2,400 hours and earned a monthly salary of $5,000. Nadal spent 20
per cent of her time manufacturing the tennis balls, 50 per cent of her time doing administrative work, and
the remainder of her time supervising the production area. Roger Sharapova, the part-time administrative
assistant, was paid a monthly salary of $1,800. Nadal also employed a part-time production supervisor,
Milos Andreescu, who was paid an annual salary of $36,000 in fiscal 2020. All salaries were paid on the
last day of the month for that month’s work.
TTB employed four part-time production workers to manufacture the tennis balls. Each of the four
production workers was paid an hourly wage of $17.50, and each was paid for 960 hours of work during
2
3
1 square foot = 0.0929 square metres.
The building had a useful life of twenty years and a residual value of $20,000.
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fiscal 2020. The production wages were paid every Friday for the previous week’s work. At the end of
fiscal 2020, the production workers had not yet been paid for a combined total of 92 hours.
OPERATIONS
Upon incorporation, Nadal took out a $300,000, ten-year bank loan with an annual interest rate of 5 per
cent. The principal was paid in equal monthly installments on the last day of every month throughout the
term of the loan. Interest was calculated each month based on the amount outstanding on the first day of
that month. Interest was paid with the principal on the last day of the month.
The fiscal 2020 insurance policy was an eighteen-month policy purchased on January 1, 2020. The
insurance policy was both a product cost and period cost. Nadal estimated that 60 per cent of the policy’s
cost was related to TTB’s production facilities while the remainder covered a variety of non-productionrelated business risks.
At 2020 fiscal year-end, TTB had some bills that remained unpaid. One of the bills in accounts payable at
year-end for fiscal 2019 had been an outstanding utilities bill for $603. TTB paid its utilities bill on the
fifteenth of the month for the previous month’s usage. At year-end for fiscal 2020, the outstanding utilities
bill for the month of December was $723. Nadal allocated the utilities expense using the same allocation
rate as the building.
On December 13, 2020, Nadal received a letter from the International Tennis Federation outlining a
potential lawsuit over faulty tennis balls. The letter stated that Nadal could be fined up to $10,000 but did
not identify who was filing the lawsuit nor when Nadal could expect to resolve the issue. Nadal was
skeptical of the letter, and after discussions with her lawyers, she concluded that a lawsuit was highly
improbable.
INVENTORIES
TTB had three raw materials: rubber, felt, and cans. TTB purchased all of its raw materials from four
suppliers (see Exhibit 4) and used the first-in, first-out method for all raw materials. A physical inventory
count revealed that there was $16,106 worth of rubber, $2,356 worth of felt, and $2,873 worth of cans
remaining on hand at fiscal year-end. During fiscal 2020, TTB had used $851 worth of production supplies.
Production supplies consisted of adhesives and green colouring. Nadal found these production supplies
difficult to trace to individual tennis balls.
At fiscal year-end, the production workers had spent a total of seventy-seven hours producing the partially
completed goods. In addition, Nadal had spent nine hours of her time manufacturing the partially completed
goods. Nadal estimated that there was $1,329 of raw materials and that twenty-nine machine hours were
used to produce these partially completed goods. A physical inventory count revealed that there were 4,230
completed cans in the finished goods inventory. No units had been damaged or stolen during the fiscal year.
Finished goods on hand at fiscal year-end were valued using the average-cost method.
TASK
Using the previous year’s statement of financial position, the bookkeeper’s meticulous records, and her
own notes regarding financial events during the year, Nadal must record all necessary accounting
transactions for the year ending December 31, 2020. Closing entries are not required.
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EXHIBIT 1: STATEMENT OF FINANCIAL POSITION
As at December 31, 2019
ASSETS
Current assets:
Cash
Accounts receivable*
Prepaid rent
Inventory†
Production supplies
Total current assets
Long-lived assets:
Building
Accumulated depreciation⎯building
Office equipment
Accumulated depreciation⎯office equipment
Production equipment
Accumulated depreciation⎯production equipment
Land
Total long-lived assets
Total assets
$
$
200,000
18,000
10,000
4,000
50,000
20,000
22,973
16,475
3,000
35,501
123
78,072
182,000
6,000
30,000
100,000
318,000
$
396,072
$
15,003
30,000
1,895
900
47,798
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable#
Current portion, bank loan
Sales tax payable
Production wages payable
Total current liabilities
Long-term liabilities:
Long-term portion, bank loan
Total long-term liabilities
210,000
210,000
Total liabilities
257,798
Shareholders’ equity:
Common stock (5,000 issued, unlimited authorized)
Retained earnings
Total shareholders’ equity
150,000
(11,726)
138,274
Total liabilities and shareholders’ equity
$
396,072
Note: *No bad debts had been experienced in fiscal 2019 and none were expected in fiscal 2020. †There was $20,250 of
rubber, $1,062 of felt, and $2,376 of cans in the raw materials inventory and $3,201 of work-in-process inventory on December
31, 2019. There were also 1,350 completed cans, valued at $8,612, in the finished goods inventory. #Includes all applicable
charges relating to utilities and a raw materials rubber order of $14,400 that was delivered but not yet paid for.
Source: Created by the author.
This document is authorized for use only by Allaa Shalaby in Cost Accounting taught by Dr Nazia Adeel, Other (University not listed) from Sep 2023 to Nov 2023.
For the exclusive use of A. Shalaby, 2023.
Page 5
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EXHIBIT 2: BOOKKEEPER RECORDS⎯POSTING OF CASH RECEIPTS AND DISBURSEMENTS*
Fiscal 2020
CASH RECEIPTS
Cash sales
ACCOUNT POSTED TO
$
198,720
Sales revenue
Accounts receivable collections
184,890
Accounts receivable
Sales tax collections
25,834
Sales tax payable
$
409,444
Cash
$
Total
CASH DISBURSEMENTS
Rent
9,000
Rent expense
†
41,313
Long-term portion, bank loan
Sales tax remittances
47,104
Sales tax payable
Insurance
2,700
Insurance expense
Salaries
117,600
Salaries expense
Production wages#
68,100
Production wages expense
Delivery wages
4,500
Delivery wages expense
Utilities
4,400
Utilities expense
Property taxes
6,000
Property tax expense
Raw materials payments, rubber**, fn
55,933
Raw materials, rubber
Raw materials payments, felt**
10,453
Raw materials, felt
Raw materials payments, cans**
12,770
Raw materials, cans
857
Production supplies
15,000
Delivery van
395,730
Cash
Bank loan
Production supplies
Delivery van
Total
$
Note: *On the super-T provided, cash receipts are marked with the trail number [R] and cash disbursements are marked with
[D]. †Includes accrued interest. #Includes accrued wages for fiscal 2019. **Includes all applicable duties and discounts. Freightin costs were not included. fn Includes payment for rubber order of $14,400 delivered in fiscal 2019.
Source: Created by the author.
This document is authorized for use only by Allaa Shalaby in Cost Accounting taught by Dr Nazia Adeel, Other (University not listed) from Sep 2023 to Nov 2023.
For the exclusive use of A. Shalaby, 2023.
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EXHIBIT 3: UNADJUSTED TRIAL BALANCE
As at December 31, 2020
Cash
$
36,687
Accounts receivable
$
Prepaid rent
3,000
Raw material, rubber
76,183
Raw material, felt
11,515
Raw material, cans
15,146
Work-in-process
3,201
Finished goods
8,612
Production supplies
980
Delivery van
15,000
Office equipment*
10,000
Accumulated depreciation, office equipment
Production equipment
168,415
4,000
†
50,000
Accumulated depreciation, production equipment
20,000
Building
200,000
Accumulated depreciation, building
18,000
Land
100,000
Accounts payable
15,003
Production wages payable
900
Sales tax payable
19,375
Current portion, bank loan
30,000
Long-term portion, bank loan
168,687
Retained earnings
11,726
Common shares
150,000
Net sales
198,720
Salaries expense
117,600
Production wages expense
68,100
Delivery wages expense
4,500
Insurance expense
2,700
Utilities expense
4,400
Property tax expense
6,000
Rent expense
9,000
Total
$
773,725
$
773,725
Note: *Office equipment consisted of desks, computers, and printers. The equipment had a useful life of five years with no
residual value. †Production equipment consisted of large metal rollers and an air pressurizer. The equipment had a useful life
of five years with no residual value.
Source: Created by the author.
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Page 7
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EXHIBIT 4: SUPPLIERS SUMMARY
Tennis Cores R Us
Rubber Stuff
All Things Tennis
Everything Cans
Raw
Material
Supplier
Rubber
Rubber
Felt
Cans
Location
St. Thomas, Ontario
Salmon Arm,
British Columbia
Valencia, Spain
Detroit, United States
FOB Destination
FOB Destination
FOB Destination
FOB Destination
3/12, net 45
2/10, net 30
5 EOM
12 EOM
N/A
N/A
8%
6%
Shipping
Terms
Discount
Terms*
Duties
Note: *Discounts were calculated from the date of ownership. FOB = free on board; EOM = end of month.
Source: Created by the author.
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SCENIC FLORAL: GO NORTH, YOUNG MAN?
Laurie George Busuttil, Susan Van Weelden, and Emma VanderPloeg wrote this case solely to provide material for class discussion.
The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised
certain names and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Our goal is to publish
materials of the highest quality; submit any errata to publishcases@ivey.ca. i1v2e5y5pubs
Copyright © 2021, Ivey Business School Foundation
Version: 2021-12-13
INTRODUCTION
It was October 19, 2020, and Ben Van Weelden, Manager of Scenic Floral Inc. (Scenic) in Beamsville,
Ontario, was contemplating ways to grow his young business. Although he had dreamt of ways to diversify
his business, for now he was considering a potential way to expand his core business of servicing Metro
Inc. (Metro) stores. Would it be advantageous for both Metro and Scenic to offer direct-to-door delivery of
Scenic’s distinctive cut flower bouquets to Metro stores in northern Ontario? Was there a sufficient market
in northern Ontario for Scenic to at least break even on a weekly delivery?
COMPANY BACKGROUND
Scenic Bouquet Company Inc. (Scenic Bouquet) was incorporated in January 2018 with four shareholders:
Ben Van Weelden (Van Weelden), who at the time was living in Colombia and working for a floral farm;
Joel Van Weelden (Van Weelden Sr.), who had sold flowers for decades; Hendrik Reinink, a business
associate of Van Weelden Sr.; and a cousin of Van Weelden.
In June 2019, Petals West Inc. (Petals) purchased a significant interest in Scenic Bouquet, providing an
injection of cash, machinery, and experience. Petals was a floral wholesaler headquartered in Winnipeg,
with four locations in western Canada. For Petals, whose major customer was Loblaw Companies
Limited (Loblaw), 1 becoming part of Scenic Bouquet would facilitate expansion into Ontario. Petals
would operate in Ontario under the “Fresh Market” banner and pursue Loblaw stores in Ontario, while
Scenic Bouquet focused on Metro stores.
Van Weelden initially secured most of Scenic Bouquet’s business from Metro and Food Basics Ltd. (Food
Basics), and 2019 was a successful first year.2 In February 2020, the company moved into a 6,000 square
foot rented facility in Beamsville, Ontario. The onsite cooler helped ensure that cut flowers imported from
Colombia were fresh when they were shipped to grocery stores. The facility provided the flexibility to
1
Loblaw had a 23.8% share of the Canadian grocery market, making it the largest player ahead of Empire Company (Sobeys,
Foodland, and others) at 16.9%; “Leading grocery retailers in Canada in 2018, by market share,” Statista, accessed May 25,
2020, https://www.statista.com/statistics/481019/leading-grocery-retailers-by-market-share-canada/.
2
Metro, which also operated under both the Metro and Food Basics banners, held 9% of the Canadian grocery market;
“Leading grocery retailers in Canada in 2018, by market share,” Statista, accessed May 25, 2020,
https://www.statista.com/statistics/481019/leading-grocery-retailers-by-market-share-canada/.
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process additional flowers in anticipation of growing the business. The company name was changed to
Scenic Floral Inc. to reflect an expanded product line.
INDUSTRY ENVIRONMENT AND COMPETITION
The Canadian floral industry consisted of two main segments. The first segment was flower and nursery
wholesale. This involved buying and redistributing both cut flowers and potted plants. In 2019, this was a
$1 billion industry 3 distributed over roughly 400 companies, none of which had more than 5 per cent of the
market. The second segment was plant and flower growing, which involved either growing plants and
flowers or buying and treating them before resale. In 2019, this was a $2 billion industry that involved
roughly 1,600 companies, none of which had more than 5 per cent of the market. 4
Overall, Canadian sales and resales of greenhouse flowers and plants (potted plants, cuttings, cut flowers,
and ornamental bedding plants) grew from $1,506 million in 2014 to $1,565.8 million in 2019. 5
In 2019, the largest distributor of flowers and plants in Canada was the mass market and chain store sector,
which distributed 27.4 per cent of sales and resales, followed by domestic wholesalers at 20.3 per cent,
direct to public sales at 14.0 per cent, retail florists at 11.3 per cent, and other greenhouses at 11.1 per cent.
Export sales represented 13.4 per cent of all sales. 6
Due to a shift in consumer purchasing practices from florists to e-commerce and supermarkets, which were
more convenient for shoppers, the more than 3,000 members of the Canadian floral industry experienced
shrinkage between 2015 and 2020. 7
Imports presented another source of competition. Imports of cut flowers and flower buds for bouquets or
ornamental purposes were $170 million in 2018, up from $156 million in 2014. This was comparable to exports
of $80 million and $51 million in 2018 and 2014, respectively. 8 Some imports received further processing in
Canada before sale to mass markets or florists, as Scenic did with the flowers it imported from Colombia.
PURCHASING HABITS OF CUSTOMERS
Cut flowers were purchased by consumers using discretionary income. Therefore, it was important to
“inspire consumers” to buy flowers and plants because of their beauty, ability to brighten one’s
surroundings, and excellent shelf life. According to the 2016 Usage and Attitude Survey commissioned by
Flowers Canada (Ontario) Inc., it was important to communicate the benefits of flowers at the point of sale.
These included improved mental health by making people happier, purifying air, and enhancing decor. 9
3
All currencies are in Canadian dollars.
IBISWorld, “Flower & Nursery Stock Wholesaling in Canada – Market Research Report,” accessed June 6, 2020,
https://www.ibisworld.com/canada/market-research-reports/flower-nursery-stock-wholesaling-industry/.
5
Statistics Canada, “Table 32-10-0023-01, Total value of greenhouse products,” accessed May 22, 2020,
www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=3210002301.
6
Statistics Canada, “Table 32-10-0022-01 Channels of distribution for horticulture product sales and resales,” accessed May
22, 2020, http://www150statcan.gc.ca/t1/tbl1/en/cv.action?pid=3210002201.
7
IBISWorld,
“Florists
in
Canada
–
Market
Research
Report,”
accessed
May
22,
2020,
https://www.ibisworld.com/canada/market-research-reports/florists-industry/.
8
Statistics Canada, “Statistical Overview of the Canadian Ornamental Industry, 2018,” accessed May 22, 2020,
https://agriculture.canada.ca/en/canadas-agriculture-sectors/horticulture/horticulture-sector-reports/statistical-overviewcanadian-ornamental-industry-2018.
4
9
The Strategic Counsel, A Report to Flowers Canada Ontario: Usage and Attitude Survey among Millennial Women, June 2016,
http://www.flowerscanadagrowers.com/uploads/2016/11/usage%20and%20attitude%20survey%20among%20millennial%20women.pdf.
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European consumers purchased cut flowers and/or flowering potted plants almost weekly and spent 10
times more per person than North Americans per year. Canadian purchasing habits fell somewhere between
Americans and Europeans. Industry surveys showed that most Ontario consumers only purchased cut
flowers for themselves three or four times per year. 10
According to a survey commissioned by Flowers Canada, 73–83 per cent of millennial and post-millennial
women and men reported buying flowers as gifts. On average, 8 per cent of this group purchased flowers
at least once a month. A gift of flowers was the second most appreciated gift, behind wine. However, wine,
gift cards, chocolates, and beer were perceived to be easier to give because they could be purchased ahead
of time. Flowers were typically used as gifts for birthdays, anniversaries, dinner parties, sick or hospitalized
family or friends, and funerals. People were apt to spend more on flowers as gifts (usually between $20 and
$29.99) than when they bought them for themselves (usually between $10 and $19.99). 11
The Winsight Grocery Business reported that cut flowers (arrangements, bouquets, fresh-cut flowers, and
roses) made up 54 per cent of grocery store floral department sales in the United States in 2018. Potted
plants and outdoor plants made up 18 per cent and 19 per cent, respectively, with the balance coming from
other products. 12 Van Weelden Sr. estimated that cut flowers made up as much as two-thirds of grocery
store floral department sales in Canada.
Mass market chains in both Canada and the United States had changed their purchasing patterns to reflect
consumer purchasing trends. The focus was on key holiday sales and the spring market, since many chains
experienced high levels of product loss (“poor sell-through”) during the rest of the year. 13 For both holiday
sales and regular sales, Van Weelden found that obtaining a placement in grocery store flyers had a
significant effect on the final sales and demand for flower bouquets.
Women typically bought flowers at a grocery store (it was the first choice for 81 per cent of millennial
women and 74 per cent of post-millennial women), while men typically bought them in person at a florist
(it was the first choice for 79 per cent of millennial men and 76 per cent of post-millennial men). Online
purchases from a florist were the third most prevalent means of purchase for all but post-millennial men,
who were more apt to call a florist. 14
SCENIC’S BUSINESS MODEL AND BASIC OPERATIONS
Scenic imported cut flowers and sold them to grocery stores in Canada. The flowers arrived in a flat
“drypack” (i.e., without water). They were unpacked and sorted into the colour assortments required to fill
orders. Next, they were cut using one of two cutting machines, and the bunches were placed into pails of
water that contained a floral solution. The pails were taken on a cart to the packing line (see Exhibit 1),
where they were sleeved and placed into boxes that were labelled and placed on a pallet. The pallets were
loaded onto a refrigerated truck for shipment to their destination.
At its inception, Scenic offered only mixed bouquets and mini arrangements sourced from the farm that
Van Weelden had worked for in Colombia. Sourcing flowers from Colombia enabled Scenic to assemble
10
Ontario Ministry of Agriculture, Food and Rural Affairs, “The Ontario Greenhouse Floriculture Industry,” accessed May 23,
2020, http://www.omafra.gov.on.ca/english/crops/facts/greenflor.htm#sector.
11
The Strategic Counsel, “A Report to Flowers Canada Ontario.”
12
Jonna Parker, “Floral Research Reveals What Retailers Need to Know Now,” Winsight Grocery Business, Oct. 17, 2018,
https://www.winsightgrocerybusiness.com/fresh-food/floral-research-reveals-what-retailers-need-know-now.
13
Ontario Ministry of Agriculture, Food and Rural Affairs, “The Ontario Greenhouse Floriculture Industry.”
14
The Strategic Counsel, “A Report to Flowers Canada Ontario.”
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Page 4
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distinct bouquets and mini arrangements for Canadian grocery stores and other retailers. Scenic relied
heavily on Van Weelden’s fluency in Spanish and his direct relationship with the Colombian farm. Van
Weelden also had a creative flair and had initially procured much of his business by designing specialty
arrangements for traditional holidays; other special occasions, such as Valentine’s Day, St. Patrick’s Day,
Canada Day, and Thanksgiving; and feature items in weekly flyers. Whereas competitors used catalogues,
Van Weelden created live samples so that store buyers could see what their customers would receive for
$9.99 or $14.99, for instance.
Prior to the COVID-19 pandemic, Scenic had been selling between 500 and 700 cases of cut flowers per
week to Metro and Food Basics via Metro’s centralized warehouse. Approximately 85 Metro stores and
135 Food Basics stores were serviced by Metro’s warehouse, although Metro and Food Basics each had
their own procurement team. Metro also had a full floral program with staff in stores who upgraded the
product by making their own arrangements and merchandising them. In contrast, Food Basics offered a
limited product line geared to price points in the $5 to $8 range, but there were occasional opportunities for
higher retail prices, such as $12 or $15 for special promotions. Scenic’s bouquets were aimed at customers
who purchased flowers frequently.
THE OPPORTUNITY
Scenic’s shareholders had ambitious growth goals. So far, Van Weelden had focused on increasing sales to
the company’s two main customers, Metro and Food Basics. He had expanded his product line by importing
a more varied and larger quantity of flowers from Colombia and by adding flowers sourced from local
growers in the Niagara Peninsula. Because some of the Colombian farms had not planted crops early in the
pandemic, by May 2020 he had no choice but to make local substitutions.
In October 2020, Van Weelden was considering a new strategy for increasing sales to Metro, specifically
in northern Ontario. He could work with Petals to provide direct-to-store delivery to the 13 Metro stores
along the Highway 11–17 corridor in northern Ontario. 15 Once a week, Petals transported potted plants
from the Niagara Peninsula to its customers in western Canada. It would be more convenient for customers
if Petals ran two trucks per week, but current volumes only warranted one-and-a-half loads per week. The
question was whether Scenic should partner with its shareholder Petals to fill the remaining half load. Van
Weelden thought that Scenic could easily sell one case per store per week on an ongoing basis at an average
price of $60 per case, with increased volumes—double or more—for holidays (Valentine’s Day, Easter,
Mother’s Day, Thanksgiving, and Christmas).
Scenic had this type of direct-to-store arrangement with another company for servicing 25 Metro stores in
the Ottawa region. Therefore, Scenic had a proven track record for servicing remote stores effectively.
However, since the Ottawa route had been established, Metro had opened a much larger warehouse in
Mississauga and now had more capacity to ship flowers with shipments of other goods. A weekly northern
Ontario route might only end up cannibalizing existing Scenic sales rather than growing this product line for
Metro. However, there could be advantages for Metro because the company would avoid having to worry
about distributing this small perishable product line to its remote Ontario stores. From Scenic’s perspective,
personal attention to the northern Ontario stores offered the prospect of growing demand for cut flowers in
those stores, creating a “pull” order approach rather than the current “push” approach.
15
For a map of Metro stores, go to https://www.metro.ca/en/find-a-grocery#.
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The cities and towns in which the 13 stores were located had populations ranging from just over 14,000 to
just over 146,000 people, with significant representation from the millennial and post-millennial age groups
surveyed by the Strategic Counsel (see Exhibit 2). Most communities had more than just a Metro grocery
store chain at which residents could shop (see Exhibit 2). Van Weelden surmised that the overall
competition for floral sales in these northern communities was considerably lower than for the industry as
a whole. He had not yet had time to do an analysis of the northern Ontario market to determine what the
weekly demand could be.
Moreover, providing a nationwide service (through Petals in western Canada, Scenic in Ontario, and
another partner in eastern Canada) could make Scenic’s offering attractive. Van Weelden reasoned that
servicing northern Ontario using a direct-to-store delivery approach could bring Scenic one step closer to
becoming Metro’s cut flower supplier of choice for all of Canada. This might make initial small-order levels
worthwhile even though the route might not be profitable initially. On the other hand, since Scenic had
started operations, it had sought an exclusive supply relationship with Metro, its biggest customer, but had
not succeeded in gaining such a commitment.
OTHER CONSIDERATIONS
Typically, each inbound “drypack” (case) from Colombia consisted of the equivalent of two to three
“wetpacks” (pails) of flowers. Outbound, Scenic’s products were referred to as wetpacks (or pails or cases)
because the bouquets or bunches of flowers were placed in pails of water, which, in turn, were placed in a
pail box. The number of bouquets per pail differed based on the product type. For example, 8 of the most
popular “10-day bouquets” that were contemplated for northern Ontario fitted into a case (pail) compared
to 15 bunches of carnations. For cut flowers, 27 cases fitted onto a pallet, and a truckload held 26 pallets.
Scenic had an estimated processing capacity of 2,000 pails per day, with a 10-hour shift and 2 teams of
processors. If needed, they could expand to either a twelve-hour shift or two shifts per day to extend their
capacity. Aside from labour, their key limitation was cooler space, although this constraint could be reduced
by loading pallets directly into a refrigerated truck. The variable cost of flowers was 61 per cent of sales.
Variable labour processing costs were 3 per cent of sales, assuming an average of 8 bouquets/bunches per
box. Additional variable costs per pail were approximately $0.40 for the pail box, pail, and pail sleeve. The
cost of a truck to Petals in Winnipeg was $3,950. If Scenic were to add a northern Ontario route, Petals
would likely be satisfied if Scenic picked up 20 per cent of that cost, but Scenic would have to pay $100
per drop at each of the 13 northern Ontario stores.
THE DECISION
Van Weelden looked across Scenic’s processing floor, watching his two processing teams hard at work on
a Monday morning. Recent orders had been strong—as many as 1,000 cases a week. Still, he knew that the
long-term success of Scenic depended on growing the business. He was drawn to a closer evaluation of
establishing a weekly northern Ontario route for Metro. What would it add to Scenic’s revenue and profit?
How many cases per week would Scenic have to sell per store to break even? Was the demand sufficient
to support this expansion initiative? Would it be a wise strategic move for his young company?
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EXHIBIT 1: BOUQUET AND PAIL EXAMPLES
Source: Company documents.
EXHIBIT 2: POPULATION OF THE NORTHERN ONTARIO LOCATIONS
Grocery Stores
Store Location
Thunder Bay
Sault Ste. Marie
Timmins
Sudbury
Sturgeon Falls (West
Nipissing)
North Bay (Nipissing)
Huntsville
Orillia
Barrie 16
2
3
1
2
1
0
2
1
3
0
5
3
3
6
1
146,050
114,095
79,682
88,054
14,365
54,625
39,350
30,505
27,950
4,895
Distance
from
Toronto
(in km)
1,386
684
705
387
382
1
1
1
1
1
0
1
1
7
4
5
7
83,150
19,816
31,166
141,434
30,940
7,145
11,035
59,800
344
221
131
98
Metro
Population
Other
Chains
Food Basics
Total
Ages
25–55
Source: “Find your Food Basics,” Food Basics Ltd., accessed January 17, 2021, https://www.foodbasics.ca/find-your-foodbasics.en.html; “Find A Store,” Metro Inc., accessed January 17, 2021, https://www.metro.ca/en/find-a-grocery; Compiled by
the case authors using data from Statistics Canada, “Census Profile, 2016 Census,” accessed January 17, 2021,
https://www12.statcan.gc.ca/census-recensement/2016/dp-pd/prof/index.cfm?Lang=E.
16
Barrie was widely considered to be a bedroom community of Toronto, with commuter trains and buses regularly throughout
the day. At one time, it was considered the gateway to northern Ontario, but with the increased growth of and easy
transportation to Toronto, many residents of Barrie made the one-hour commute to their jobs in Toronto.
This document is authorized for use only by Allaa Shalaby in Cost Accounting taught by Dr Nazia Adeel, Other (University not listed) from Sep 2023 to Nov 2023.