“Araliya Mushrooms” is a business firm situated in Baddegama, Galle which was founded in 2013. The business started on a small scale with only 2 people and now the firm is expanded within 5 years of time. There are 5 people currently working in the firm. “Araliya mushrooms” firm is the largest mushroom production firm in that region. The main target customers of the business are small scale vegetable vendors.

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2. Introduction
“Araliya Mushrooms” is a business firm situated in Baddegama, Galle which was founded in
2013. The business started on a small scale with only 2 people and now the firm is expanded
within 5 years of time. There are 5 people currently working in the firm. “Araliya
mushrooms” firm is the largest mushroom production firm in that region. The main target
customers of the business are small scale vegetable vendors.
This firm provides 2 types of mushrooms (Abalone, American oyster) and 2 types of products
(fresh mushroom, dried mushroom) to the local market and to the hotels. The vision of the
firm is to supply best quality products using best quality raw materials by satisfying the
customer demand. Developing the firm as the best mushroom firm in the area is the mission
of “Araliya Mushrooms”.
Fresh mushroom production is carried out on a large scale when compared with the dried
mushroom production. The demand for fresh mushrooms is higher than dried mushroom. Due
to the low demand and the high production cost for dried mushrooms, the production is
carried out on a small scale.
Being situated in the southern coastal area, the firm gets more privileges for their business
due to its high market demand for mushrooms. The main reason behind the high demand for
mushrooms is because of the large number of foreigners who visit Hikkaduwa. The climate
of the area is also suitable for mushroom production. These reasons are involved in starting
the “Araliya Mushrooms” business firm.
Background of the business
Demand for the mushrooms in the area is high because of the tourism industry and the large
number of reception halls. There are few small-scale mushroom suppliers in this region but
the supply is not sufficient for the high demand. There is an opportunity for a firm due to the
above-mentioned reason. That is the main reason behind starting the “Araliya Mushrooms”
business. This business is started as a self-employed business starting with two people and
able to expand up to 5 people by now within 5 years due to higher demand for these products.
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3. Graph-1
Graph-2
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4. Graph-3
According to the above graphs, a gradual increase in production weight of mushrooms
can be seen. This is due to the expansion of the “Araliya mushrooms” business firm.
With the increase in production of mushrooms, an increase in mushroom packets sold
and sales revenue obtained also increased yearly.
The main raw materials used for mushroom production are,
● Wood dry rots
● Mushroom seeds
● Polythene bags
● Water
● Cotton wool
● Calcium carbonate and phosphorus mixture etc.
Economic issues facing the firm
Determinants of the demand for the firm and market
● Season that more tourists visit southern province (November – February)
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5. From November to December the number of tourists visiting the Hikkaduwa area is
high and the demand for the mushroom from hotels and guest houses also rises. The main
reason for high demand for mushrooms from hotels during this season is most of the tourists
prefer different types of foods with mushrooms and most of their foods are prepared using
mushrooms.
Due to the high demand, the supply of mushrooms from the small scale suppliers in
that area is not sufficient. Due to the high demand and low supply there is an opportunity for
the “Araliya Mushroom” firm for their business. Within 4 years’ time, the firm is able to
expand their business by supplying their products to more and more customers in the area.
According to the annual sales report (2016 & 2017), during this period of time (from
December, 2016 to February, 2017), an average of 1572 fresh mushroom packets are sold per
month. The average mushroom production obtained during these months is 314.4 Kg. With
the expansion of the firm, a gradual increase in selling can be seen from the below graph. But
in 2017, it is observed that the mushroom production and selling has decreased. The main
reason for decrease in production is due to the lack of wood dry rots during this year.
Graph 4
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6. ● Holidays
On special days such as holidays, the demand for mushrooms increases. Especially in
poya days, most of the people are willing to prepare their meals avoiding meats and other
food products from animals. Therefore most of the people try to get mushrooms as an
alternative for animal products. The higher protein content in mushrooms is a reason. It is
observed that the demand for mushrooms has increased during these days.
Special days like Christmas come once per year, so that people who celebrate such
festivals are willing to make special types of foods that contain mushrooms. Therefore, the
demand increases during such days.
According to the Annual sales report- 2017, during poya days an average of 55 fresh
mushroom packets are sold and the mushroom production is about 10 Kg per day. A clear
increase in selling mushrooms these days can be seen.
● Days of public fair
Most of the people in village areas usually buy vegetables and other products that are
sufficient for their weekly consumption from the public fair. Many people are gathered to
such places, so that the demand for some products increases. Mushroom is one such product.
The public fair is held mostly on Sundays and Thursdays. Therefore the demand for the
mushrooms during these days shows a rapid increase compared with the other days. In those
days the mushroom products were sold to the vegetable vendors in the fair.
On such days, around 30 packets are manufactured in order to sell in the fair. The
average production during these days is 60 mushroom packets and the production weight is
about 12 Kg.
● Special occasions
“Araliya mushrooms” receive different orders other than from the vendors and they
will provide their products to those customers. For special occasions like weddings, parties
and almsgiving, people in the area tend to buy mushrooms from the firm. The demand for the
mushrooms becomes high because the customers need more mushrooms for preparing their
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7. meals for a large number of people. In Sri Lanka, generally the number of weddings fall in
May is much higher when compared with the other months. Therefore during May, the
demand for the mushrooms from the hotels and guest houses and other customers increase.
Therefore the customers need more products in those special days. That increases the
demand for the mushroom in those days.
According to Annual sales report- 2016, an average of 2109 packets are sold during
the month of May. The average number of production during May, 2016 is 421.8 Kg.
According to Graph 4, a clear increase in mushroom selling can be seen during the Month of
May(5th month).
● New year season
It is observed that during the New Year season (April) the demand for the mushrooms
is low. The main reason for the low demand for mushrooms in this season is because people
tend to prepare different types of traditional foods which do not need mushrooms. The other
reason is most people buy food for a week or two weeks at once as most of the shops are
closed during the new year days. As the shops are closed during these days the demand for
mushrooms gets low.
Though the demand for fresh mushrooms is low during this season the production of
mushrooms can not decrease at once since it takes some time to grow the mushrooms.
Therefore the suppliers tend to produce dried mushrooms more during this season with the
low demand for the fresh mushrooms.
According to the sales reports-2017, the average number of production was 249 Kg
and 1245 fresh mushroom packets were sold during April 2017. According to the Graph 4, it
is clear that a fall in the number of fresh mushroom packets sold during this month.
● Competitors
There are several mushroom suppliers so that the market is getting competitive. There
is a competition in the market for mushrooms. The competition is much higher because the
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8. expiration duration of a fresh mushroom packet is 2 days and each day suppliers supply their
products to the market.
Assume that there is a supplier called ‘A’ that can produce 100 mushroom packets
and ‘B’ that can produce only 20 mushroom packets. Supplier A is trying to increase the
selling rate of his product so that he can reduce the unit price. That will cause the reduction of
total profit but it can be considered as a sacrifice to increase the selling rate of the mushroom
packets. But the supplier ‘B’ cannot do that because the reduction of the profit is highly
affected by the small scale business. Therefore these kinds of competitors are a challenge for
the firm.
But on the other hand if the mushroom firm is expanded the production rate increases
and with the decrease in unit cost of a mushroom packet, their products can be sold at lower
prices. That will increase the profit and the demand for the brand name of the firm. It can be
that the competitors affect the demand of the products in the business firm.
● Low supply of production to the market
Due to various reasons during some seasons the production which can be supplied to
the market gets low. Some such reasons are insect attacks and spread of diseases to the
mushrooms. Though the demand increased as the firm can not supply the required production
in order to satisfy the demand there is a risk for the market with the other suppliers. If
competitors enter the market during that season, the demand for the firm decreases due to
low supply of mushrooms to the market. If the customers get used to buying such products of
other suppliers, the demand for the firm will get lower in the future.
Determinants of costs for the firm
● Manufacturing cost
o Increase of price of raw materials
The main raw materials required for the production of mushrooms are wood dry rots,
seeds, polythene and chemicals. If the price of any of the raw materials increases the cost of
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9. production of a mushroom packet increases. That will be affected directly to the profit of the
business. The following options can be implemented in order to maintain the same profit after
the increase of raw materials.
o Use other substitutes for the raw materials
If the price of wood dry rots increases, straws and coir can be used as a
substitute for dry rots because of the low cost. But there are some other factors such
as production compared with use of dry rots etc. need to be considered before
changing to a different substitute.
Padding can be used as a substitute for cotton if the price of cotton gets
increased. Though the padding cost is much lower than the cost for cotton, the
probability of spreading diseases is higher. So we need to consider both factors
simultaneously when changing to a different substitute.
o Increase the selling price of the mushroom packet
If the firm can not get a relevant substitute or any other solution to decrease
the cost for raw materials, the selling price of the mushroom packet needs to be
increased. Since there are several suppliers of mushrooms in the market the demand
for the product of the firm decreases when the price of a packet gets increased than
other products.
● Packing cost
o labels, sealer, polythene
There are several components and equipment that are used in packing procedures. The
firm use polythene bags and labels that contain description and details of the products. For
polythene, there is a standard gauge size. The price of the polythene gets changed from time
to time. Generally the polythene cost rises and the cost for the production also increases.
As a substitution, printed polythene bags that contain all the details of the label can be
used. But the unit cost is slightly higher than the cost of individual polythene bags and labels.
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10. Though the cost increases, there is an advantage in using these because those can add
attraction to the product and thereby the demand also increases.
The other cost related to packing is the sealing cost. The sealer which is used for
sealing consumes the electricity. The total electricity cost for the production is comparatively
small with the other costs. But the electricity cost also affects the total cost of the production.
● Transport cost
o Change of fuel price
Transportation is also a production cost for the firm. If the fuel price increases
the transportation cost will also get increased. That will affect the production cost of
mushrooms too. In those situations, the profit which can be earned by selling
mushrooms also decreased. It is the duty of the firm to decide whether to increase the
price of the product if the transportation cost is too high or to bear the loss in profit
during that season.
● Cost need to bear during pest attacks and disease spreading
During some seasons the attacks by pests get increased. In those seasons the
production of mushrooms also gets low. But the cost for the production remains unchanged.
An additional cost is also spent on such situations, in order to avoid spreading these diseases
and avoid harmful effects of the insects. For adding different types of chemicals and
fertilizers a considerable amount of cost needs to be spent by the firm.
Economic decision problems facing the firm
● Bank loans
o To enlarge the existing production house
To get a higher production rate in order to satisfy the higher demand,
management will try to expand the production house. When expanding the firm there
are some initial costs such as cost for building a place to store the mushrooms, buy
more boilers, equipment etc. By using a bank loan the firm can be expanded by
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11. creating a required environment for growing mushrooms on a large scale. With that
decision the current production rate will decrease until the constructions are over.
During that period of time suppliers cannot fulfill the market demand, so that
customers will try to use substitute products. Another major issue is that the time
period will pave the way for the new suppliers to introduce their products. So that the
vendors will promote that substitute product. After the firm gets settled and comes to
the desired level of production, there will be a problem for the demand of this
product. So that supplier will be in danger. The best way of doing the enlargement of
the production house, without reducing the current production rate is making a new
production house larger than the current house and after finishing that house, repair
the old production house.
Here there are also limitations of proceeding that idea. There will definitely be
repairs in the production house after sometimes. On that occasion, the reduction of the
supply cannot be avoided. So that there must be some effective solutions in order to
overcome such problems.
o To buy equipment and machinery
This firm needs to bear some costs when buying equipment and machinery
such as mushroom packet sealing machine, dry rot mixing machine, mushroom
dry-rot packet steamer, mushroom drying machine, etc. The purchasing cost of these
equipment and machinery are very high, so that by using a bank loan the cost for
buying these equipment can be found.
The main advantage of using equipment and machinery is to reduce the cost
for labours and thereby increase productivity. Increasing productivity will highly
affect the market because then the firm can supply more products to the customers
who are willing to buy mushrooms. So that the firm can earn high profit and the
demand for the product also increases.
● Direct marketing to the customers without mediators, vendors.
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12. o Imagine that the money received by the vendor per mushroom packet is Rs.90
and the selling price is Rs.100. So that vendor gets Rs.10 per packet as the
profit.But if the supplier of the mushroom production, can directly deal with
the customers, they can receive Rs.100 per mushroom packet. So that the sales
revenue from one unit is Rs.100. So the total profit is increased. Also the
customers are also seeking lowest price mushroom packets in the market from
different suppliers. If the suppliers can directly supply mushrooms to the
customers, they can give mushroom packets at Rs.90. So that customers are
willing to buy products from such suppliers because of the low price.
The problem faced when implementing this decision is finding more
customers without the involvement of mediators and vendors. Though the
profit we can earn without mediators is high, the selling rate may fall because
the number of customers we can directly sell mushrooms may be limited.
● Make a budget and work on it
Budgeting is the most effective way to control cash flow and other capital
resources of the firm. In addition to that a well-structured budget helps to take
decisions to achieve objectives of the business. But the constraints of the budget may
affect the economic decisions of the business. Because this firm has limited amount of
capital resources to work with and the sum of all expenditures of products should
never exceed the available capital.
It is possible to exceed the availability of capital, since there are credit
availabilities such as bank loans. But it is essential to consider the ability to repay the
credits before making a budget with debts. To overcome the issues of the budget it is
useful to have a background knowledge of other manufacturers of the Hikkaduwa
area, expenditures and the capital availability when creating the budget for the
business. So the business can reduce unwanted expenditures and improve the profit by
work according to a well-structured budget.
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13. Factors affect management and firm
● Government policies and interest of the bank loans
In current situation of the country, there are no special government policies that
especially affet for the mushroom industry, because that industry is considered as a
method of self employing industry. But there are several guidelines that must follow
the production as these are foods.
Assume that the supplier is willing to expand his business and he is willing to apply
for the bank loan. If the interest of the bank loans are increased the supplier thinks
again to apply for the bank loan. Another thing is if the supplier gets a bank loan, he
should have to increase the price of the product to pay the bank loan while making
some profit.
● Issues of finance controlling
To ensure success in the business, it is required to have a proper control in
finance. Otherwise the business may have to face many financial failures. For that we
have to create an estimation for the expenditures of the entire procedure for a
considered time period. And also it is required to consider the estimated profit and the
current debts of the business. The real expenditures and profit should be maintained in
their accounts during the considered time period. Then those estimation and the real
accounts can compare to get an idea about the estimation of the next time period and
have a success in the next time period by correcting the mistakes of the current
estimation. And most importantly it is required to have a person with enough financial
management skills for success of financial controlling of this business.
● Employee Management
With the growth of the expected supply it is needed to have new employees to
the firm. But the new employees may not have prior experience with this kind of
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14. mushroom processing. So the required training for them should be given by the firm
to have the expected outcome from those new employees. Also the employee
management process should provide the environment to the employees to provide
their expected services happily by giving them enough salaries and other motivational
things. Otherwise the problems with employees may make the troubles in the firm.
Graph analysis
The following graphs represent the number of packets sold during each month in
2013, 2014, 2015,2016 and 2017.
Graph- 5
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15. Graph-6
Graph-7
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16. Graph-8
Graph-9
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