Case Study: Vancouver Honey Exporters' Expansion into Singapore

After establishing successful export operations into Australia and the European Union, Vancouver Honey
Exporters (VHE) is considering expanding its export operation into Singapore.

As with many Canadian honey producers, VHE has experienced great success in exporting its products.
VHE's annual sales have grown to $6 million (CAD) annually, with exports accounting for two-thirds of
their annual sales ($2 million into Australia and $2 million into the European Union). They feel they have
maximized the export potential in Australia. The company continues to grow its market share in the
European Union, but the growth is slow due to intense competition from other Canadian exporters. So,
they are looking at other foreign markets. VHE has considered the larger markets in Asia, such as China
and South Korea, but management feels the competition is also too intense and has decided to focus on
Singapore. The honey market in Singapore is estimated to be over S$10 million annually.

Eleanor Thompson, VHE's Director of International Operations, through her business contacts in
Australia, has met key importers from Singapore. She is confident VHE can sell a minimum of S$250,000
of product into Singapore in the first year, and the potential annual exports into Singapore could value
S$1,000,000 annually within 3 years. Ms. Thompson has a tentative deal with the Singaporean food
importer, Fave Foods Pte Ltd (FFPL). There is an initial purchase order of 6,000 – 400g jars of honey,
which is the minimum order that both parties feel would be cost-effective. If this order goes well
(quality of product, smooth import experience, sell-through, etc.), the buyer will commit to minimum
annual purchases of S$750,000.

FFPL's purchase order:

Fave Foods Pte Ltd Purchase Order

Date: January, Year 1

Purchase from: Vancouver Honey Exporters

300 Cases 20 x 400g jars Honey

Shipping: Cost, Insurance & Freight (CIF) Port of Singapore. Note Exporter will pay Singaporean Import
Duties.

Delivery: On or before April 30, 2023. Late Deliveries will not be accepted.

Terms: On open account. 60 days terms from the date delivery to Port of Singapore.

Total Due: S$150,000

FFPL would sell the honey through its wholesale division for S$540 per case of 20-400g jars to its retail
customers (grocery stores and markets), who would sell the individual jars to the end consumer for
S$30.

Fave Foods Pte Ltd is a well-established Singaporean food importer. They specialize in the import of
specialty food products. The company is one of the largest importers of food from North America. FFPL
has an extensive customer base and is known to excel in bringing new products to the Singaporean
market. They have a solid financial trade record, including paying their suppliers on time.
VHE's Costs: After some analysis, the following costs were determined: Production: $C4.00 per 400g jar,
including jar and label, packaged in a case of 20, ready for export to Singapore.

Shipping costs and other related costs (for 6,000 jars, 300 cases): Needed services to export to
Singapore. Costs are as follows: Shipping from VHE to Port of Vancouver: $C500 Shipping from VHE to
Port of Singapore: $C3,000, including all related costs (shipping, handling, freight, insurance,
documentation, etc.), not including the 10% duty on honey being imported into Singapore (calculated on
raw production costs done outside of Singapore).

VHE's first-year costs:

The company's first-year costs, including one-time market development costs (marketing, trade shows,
label design, translation, administration, legal fees, etc.) are estimated at $C200,000. Note: After the
first year, VHE's ongoing SG&A expenses are estimated to be $C150,000 per year if the company's
export volume to Singapore is S$750,000 and S$1,500,000.

Current exchange rates:

1 CAD = 1.056 SGD

1 SGD = 0.947 CAD

1 CAD = 0.8111 USD

1 USD = 1.233 CAD

1 USD = 1.356 SGD

CAD – Canadian Dollar

SGD – Singapore Dollar

USD – American Dollar

Questions:

1. Based on the 300-case order, what are VHE's cost per unit (case of 20) to produce the exported
honey (in both CAD and SGD)? Please show your calculations. 10 points.
2. Produce a simple income statement (in CAD) for VHE if they only sell the initial order and then
cease exports to Singapore. 10 points.
3. Produce a simple Income statement (in CAD) for VHE if they export S$750,000 of honey to
Singapore in the first year. 10 points.
4. Produce a simple income statement (in CAD) for VHE if they export S$1,500,000 of honey to
Singapore in year 2. 10 points.
5. VHE's revenue will be in Singapore Dollars while their expenses are in Canadian Dollars. Discuss
the Currency Risk for VHE when entering into a forward contract with a maturity of six months.
What happens if the value of the SGD increases versus the Canadian dollar? What happens if the
value of the SGD decreases? How could the company use other financial instruments to hedge
the risk? 10 points.
 6. How do you feel about the buyer wanting 90-day terms? Is this reasonable? Is it too much risk?
If you were to negotiate payment terms, what terms would you counteroffer? Explain your
rationale and consider alternative payment methods to reduce risk. 5 points.
7. Vancouver Honey Exporters may want the incoterm used to be Cost, Insurance, and Freight (CIF)
Port of Singapore. In VHE's case, where does the ownership and risk transfer from the seller to
the buyer? What are the advantages/disadvantages for VHE in comparison to the FOB Incoterm?
5 points.
8. Bonus Question: If FFPL's purchase volumes exceed S$1,000,000, they may ask for a price
reduction. What strategies could VHE consider maintaining their profit margins while
accommodating the buyer's request? Explain, and consider different cost-cutting measures and
potential negotiation tactics. 5 points.

Total 60 points.

Sample Solutions

1. VHE's cost per unit (case of 20) to produce the exported honey:
• To calculate VHE's cost per unit (case of 20) to produce the exported honey, we need to
consider the production cost per 400g jar, including the jar and label, and the number of jars
in a case.
• Production cost per 400g jar: CAD 4.00
• Number of jars in a case: 20
• Cost per unit (case of 20) in CAD: CAD 4.00 * 20 = CAD 80.00
• To convert CAD to SGD, we'll use the exchange rate: 1 CAD = 1.056 SGD
• Cost per unit (case of 20) in SGD: CAD 80.00 * 1.056 = SGD 84.48
• Therefore, VHE's cost per unit to produce the exported honey is CAD 80.00 and
SGD 84.48.
2. Simple income statement for VHE if they only sell the initial order and then cease exports to
Singapore:
• Based on the provided information, the initial purchase order from FFPL is for 300
cases of 20 x 400g jars of honey, with a total due of S$150,000. To calculate the
revenue and profit in CAD, we'll need to convert the total due from SGD to CAD
using the exchange rate.
• Total due: S$150,000
• Conversion rate: 1 CAD = 1.056 SGD
• Revenue in CAD: S$150,000 / 1.056 = CAD 141,955.22
• Shipping costs:
• Shipping from VHE to Port of Vancouver: CAD 500
• Shipping from VHE to Port of Singapore: CAD 3,000
• Revenue: CAD 141,955.22
• Cost of Goods Sold (COGS): CAD 24,000
• Shipping Costs: CAD 500 + CAD 3,000 = CAD 3,500
• Gross Profit: Revenue - COGS - Shipping Costs = CAD 141,955.22 - CAD 24,000 - CAD 3,500 =
CAD 114,455.22
• Income Statement (in CAD):
• Revenue: CAD 141,955.22
• Cost of Goods Sold (COGS): CAD 24,000
• Shipping Costs: CAD 3,500
• Gross Profit: CAD 114,455.22
3. Simple income statement for VHE if they export S$500,000 of honey to Singapore in the first year:
• To produce a simple income statement (in CAD) for VHE if they export S$750,000 of honey to
Singapore in the first year, we need to consider the revenue, cost of goods sold (COGS), and
selling, general, and administrative (SG&A) expenses.
• Given:
• Revenue: S$750,000
• To convert SGD to CAD, we'll use the exchange rate: 1 CAD = 1.056 SGD
• Revenue in CAD: S$750,000 / 1.056 = CAD 709,559.32
• Cost of Goods Sold (COGS):
• 300 cases * CAD 80 per case = CAD 24,000
• SG&A Expenses: CAD 150,000 (as stated in the case study)
• Gross Profit: Revenue - COGS = CAD 709,559.32 - CAD 24,000 = CAD 685,559.32
• Net Profit: Gross Profit - SG&A Expenses = CAD 685,559.32 - CAD 150,000 = CAD 535,559.32

• Income Statement (in CAD):

• Revenue: CAD 709,559.32
• Cost of Goods Sold (COGS): CAD 24,000
• SG&A Expenses: CAD 150,000
• Gross Profit: CAD 685,559.32
• Net Profit: CAD 535,559.32

• Therefore, the simple income statement for VHE, if they export S$750,000 of honey to
Singapore in the first year, shows a gross profit of CAD 685,559.32 and a net profit of CAD
535,559.32.
4. Simple income statement for VHE if they export S$750,000 of honey to Singapore in year 2:
• To produce a simple income statement (in CAD) for VHE if they export S$1,500,000 of honey
to Singapore in year 2, we need to consider the revenue, cost of goods sold (COGS), and
selling, general, and administrative (SG&A) expenses.
• Given:
• Revenue: S$1,500,000
• To convert SGD to CAD, we'll use the exchange rate: 1 CAD = 1.056 SGD
• Revenue in CAD: S$1,500,000 / 1.056 = CAD 1,413,898.94
• Cost of Goods Sold (COGS):
• 300 cases * CAD 80 per case = CAD 24,000
• SG&A Expenses: CAD 150,000 (as stated in the case study)
• Gross Profit: Revenue - COGS = CAD 1,413,898.94 - CAD 24,000 = CAD 1,389,898.94
• Net Profit: Gross Profit - SG&A Expenses = CAD 1,389,898.94 - CAD 150,000 = CAD
1,239,898.94

• Income Statement (in CAD):

•
• Revenue: CAD 1,413,898.94
• Cost of Goods Sold (COGS): CAD 24,000
• SG&A Expenses: CAD 150,000
• Gross Profit: CAD 1,389,898.94
• Net Profit: CAD 1,239,898.94

• Therefore, the simple income statement for VHE, if they export S$1,500,000 of honey to
 Singapore in year 2, shows a gross profit of CAD 1,389,898.94 and a net profit of CAD
1,239,898.94.
5. Currency risk: By entering into a forward contract, VHE can lock in the exchange rate for a specific
period, mitigating the risk of currency fluctuations. If the SGD appreciates against the CAD, VHE will
benefit as their revenue in CAD will increase. If the SGD depreciates against the CAD, VHE's revenue
in CAD will decrease. Other financial instruments, such as currency options or swaps, can also be
used to hedge the currency risk.
6. The 90-day terms might be a bit longer than usual but may be acceptable if the buyer is trustworthy
and has a good payment history. As a counteroffer, VHE could suggest 45-day terms, or a
combination of shorter terms and a letter of credit to reduce risk.
7. With the CIF incoterm, the ownership and risk transfer from the seller to the buyer when the goods
are loaded on the vessel at the port of shipment. The advantages for VHE include more control over
the shipping process and insurance coverage. Disadvantages include higher costs and responsibility
for the logistics up to the port of Singapore.
8. To maintain profit margins while accommodating the buyer's request for lower prices, VHE could
explore cost-cutting measures such as:
• Negotiating better deals with suppliers for raw materials, packaging, or other inputs
• Improving production efficiency by investing in new technology or streamlining operations
• Finding more cost-effective shipping options or negotiating better rates with their current
shipping provider
• Considering an alternative Incoterm that shifts more responsibility and cost to the buyer, such
as FOB (Free on Board)
• Additionally, VHE could offer volume discounts based on specific purchase thresholds,
incentivizing the buyer to purchase more products and potentially offsetting the reduced profit
margin per unit. They could also negotiate longer-term contracts with the buyer, which could
provide better predictability in terms of revenue and costs, enabling VHE to plan more
effectively for future production and cost-saving measures.