THOMSON GREENHOUSE QUESTIONS AND SOLUTIONS Question 1.

Discuss the implications of the Thomsons attempting to obtain additional commercial contracts (the department stores) for their products.

Solution
On the positive side, securing department store contracts would provide a market for increased sales and stability for the business as this appears to be a growing market. This market does not require selling time or resources at the greenhouse which would be a reduction in operating expenses. Concerns which the Thomsons should address, however, before pursuing this market are as follows: it is a very competitive market--margins will be small, delivery and freight costs to the department store would increase, the compromise in quality relative to their consumer market. This last point could be a significant one as the Thomsons will have to, at some point, decide which segment of the market they will focus on. They will have difficulty appealing to both segments--the commercial-low price-lower quality product, or the consumerhigh quality--higher price segment. As an independent business, they would likely be best advised to stay with the higher quality segment where they can emphasize their natural advantage in providing quality personalized service. Before making this decision it would also be worthwhile for them to research the growth prospects for the two segments. This information could be obtained from industry sources or primary research. Question 2. Evaluate the decision to construct another greenhouse from a financial as well as organizational point of view. (Use rate of return, payback, and break even analysis in your evaluation.)

Solution
The Thomsons should be aware of the additional work and organizational requirement that will be involved with the construction of the new greenhouse. This may require an adjustment in roles and responsibilities within the business. As mentioned in the case, the old greenhouse will need to be replaced or receive

major renovations soon. The Thomsons could evaluate the new greenhouse financially by using:

Rate of Return method: Cost of greenhouse = $12,000 Life of greenhouse = 10 years Projected profit = $9000 (current operation) - 6400 (interest costs of borrowing 8000 @ 8%) - 240 (depreciation 12000 @ 2%) = $2360. Rate of Return = $2,360 $6,000 = 39% Payback Method: Cost of greenhouse = $12,000 Income = $2,360 Depreciation = $240 Payback = $12,000 $2,360 + 240 = 4.6 years Breakeven Point: Cost of greenhouse Profit margin B.E.P. = $12,000 = 29% (from current income statement) = $12,000 29% = $41,379 in sales.

The financial evaluation indicate that a new greenhouse provides a good return on investment and a positive payback. Due to lower profitability, however, the break even calculation suggest that Thomson should attempt to increase profitability for the greenhouse. This could be accomplished due to its expected higher efficiency. Question 3. Comment on the financial health of the Thomson Greenhouse through a review of the financial statements.

Solution
Liquidity: Current Ratio = Current Assets Current Liabilties = $5,500

$1,500 = 3.7:1 which is very healthy Debt Ratio = Total Debt Equity = $109,000 $1,500 = 126: 1 which is very healthy Thomson Greenhouse should have not difficulty in borrowing money to finance expansion with current liquidity levels. Productivity: Inventory Turnover = Cost of Goods Sold Inventory = 11,395 3,000 = 3.8 times

The productivity for Thomson Greenhouse appears to be healthy in that the growing season of such businesses is several months. Profitability: Profit on Sales = Profit Sales = $9,050 $37,000 = 24.5% = Profit Equity = $9,050 $109,000 = 8.3%

Return on Equity

The profitability for Thomson Greenhouses is very healthy as the profit on sales figure compares favorably to the industry average of below 10%. The return on equity is higher than could be obtained by placing money in the bank. Question 4. Discuss the implications for succession of the business if the decision was a) to pass the business to one of the sons b) to sell the business to someone outside the family. Solution 4

If the business was passed on to one of the sons the following considerations should be made. First, the roles of the various family members should be clarified. Even though the ownership of the business is in the hands of the son, are the parents still going to exert informal control? Second, are the parents sure that the sons have the interest and ability to take over the greenhouse business? Third, how will the sons that are not a part of the ongoing operations feel about the arrangement? Will some compensation or other consideration be given to them? Fourth, how will the transfer be arranged to as to provide incentive for the son, financial security for the parents, and minimum tax related consequences for both parties. It would appear that a life estate or purchase at a favorable price might be the most favorable. If the business is sold to someone outside of the family the following should be important considerations. They will want to minimize the tax consequences of the sale. They will need to set a price that will provide them a reasonable return but will be attractive to the purchaser. Following the purchase what will Earl and Lisa as well as their sons do? Are there any of them that might be interested in carrying on the family business? If they decide to sell the business they should ensure that the performance is positive in the years prior to the sale as this will influence the purchase price positively. Might the land which they own be valuable for other purposes since it is located close to a growing city?