Course Title : Management Accounting

Course ID : ACN202
Section : 5
Submitted to : Mohammed Naveed Adnan Siddique
Submission Date : 20th September 2020
Summer 2020
Submitted By : Ramisa Hossain
ID : 1822126
Table Of Contents :

Acknowledgement 3
Introduction 3
Problem Statement 4
Strategy 4
Success Factors 4
Distribution Strategy Analysis 4
Investment 6
Increased Amount For Online Campaign 6
Difference Between Variable Costs 6
Unit Contribution 7
Tradeshow 8
Online 8
Break-even Point 9
Expected Profit 10
Analysis and Decision 11
ACKNOWLEDGEMENT
I would like to express my sincere gratitude to my instructor, Mohammed Naveed Adnan
Siddique sir for the continuous patience, guidance and support throughout the entire semester
which we had to do virtually. His guidance has helped me a lot in all the time of planning and
writing of this report and finishing this course.

Thank you.

INTRODUCTION

This case introduces Foxy, a company owned by Ger and Chemel, two partners who are
devoted and driven by passion in the designing and manufacturing of jewelry products which
are sold in USA and Canada using retail stores. The company designs jewelry to cater to
different tastes of customers and generating profitability of the business simultaneously.
Apart from this, the partners focus on selling joyful and exciting products to the customers
which are of high quality and affordable at the same time. This ensures a strong customer
base and also maintains high customer retention rates resulting in increasing sales margin and
profitability. Due to this, the company ensures its survival in the midst of a highly diverse and
competitive market without having to sacrifice its ability to ensure going concern.

The company’s owners are facing a dilemma regarding the fact that they both are married
with kids which means that they will not be able to devote the same amount of time and effort
to attend trade shows which is a crucial factor in sourcing retailers to carry the product line of
the company. This results in a threat to the profitability of the company.

As of the 2013, primary sales and area of operation is USA and Canada of which US
generates 70% of sales revenue and online sales represented 15%. On the other hand, Canada
accounted for 90% of the company’s revenue in 2007.

The partners Ger and Chemel are dynamic and always looking for innovative ways to
improve their designs and quality, enhancing the products’ appeal to the customers and
benefiting from large scale sales driving costs down and increasing its market share.
PROBLEM STATEMENT

The primary issue that is being faced by Foxy is the fact that the owners are considering
expansion into the online market which would make the products sold by the firm to
worldwide market. The constraint that is faced by the firm is the fact that they have limited
resources at their disposal. Hence the company has to choose between properly marketing the
online expansion or to maintain its existing retail distribution through trade shows.

STRATEGY

In order to enhance customer satisfaction, Foxy has always executed effective and efficient
strategies. Their main motto is to provide customers with a value for money product at the
same time satisfying their appetite with an exciting product. Apart from this, it aims to
provide its customers with an utility orientated product, thereby increasing customer
satisfaction and gaining a competitive edge in customer retention rate while at the same time
boosting its sales margin.

SUCCESS FACTORS

The main asset ensuring the success of the company is its strong relationship with its retailers
who carry and display their product lines to the US and Canadian customers via their stores.
Also, the partners have been actively involved in this sector from a very young age which
adds valuable experience to their already dynamic product development and gives a
competitive advantage in terms of maintaining and sustaining market share.

1. Assessment of each distribution strategy from a qualitative point of view:

Online Sales
The major benefit that Foxy will derive from expanding in the online sales is that its products
will not be limited to the customers vising their retailers but to anyone in the world with
access to internet anywhere in the globe. If they can tap into this, their customer base will
increase exponentially and in return boost sales by multifold. The predictions of customers
buying online is also in the upward trend and this would further increase the profitability of
the firm. Apart from this, the online expansion will also allow the partners to travel less to
attend trade shows and they will be able to spend more time with their family thus ensuring a
more balanced work life. They will also be able to focus on product development and come
up with more innovative designs since their time off work will be significantly reduced.

The major obstacle that Foxy will face if they opt for online expansion is the establishment of
trust with the online customer base. This problem does not exist in their existing model of
distribution because their products are already in place in the shops of their retailers. Price
competitiveness is also another factor that needs to be considered before opting for online
expansion. This is because their products are not cheap and they will be in direct competition
with online giants such as Amazon and Ebay which have more acceptability and market
reach. Foxy also has a strategy of same price for US and Canada and need to revise them
before entering the global online platform because their Asian counterparts might have a
similar item priced at a much cheaper rate. This will make Foxy’s penetration into foreign
market more difficult. Finally, Foxy also needs to consider shipping costs that will be
incurred by a foreign buyer. A high shipping fee may deter people from buying even if the
cost of the product may seem reasonable.

Tradeshows

From the case it can be positively stated that Foxy has been successful in getting the best out
of participating in trade shows. Historically it has worked as the prospective retailers have
been able to meet the dynamic owners in person and thereby increasing the conversion and
retention rate of retailers. The chance of the market being saturated is also minimal in the
model of tradeshows since there are always newbies among the 75000+ attendees every year.
The partners also have experience in how to participate and engage the attendees in the trade
shows. Hence tradeshows represent a safer and cautious approach for the firm.

The problem with tradeshows lies in the fact that it involves more time of the partners which
they are not willing to do given their increasing family commitments. This poses a risk with
their interaction with the retailers which might result in slacked sales and in turn reduction of
profits. It is worth mentioning that the partners are opting for recruitment of representatives
for attending the tradeshows but their ability to match their dynamic partners remains to be
seen. Thus, their consistent success is at risk if the partners delegate the attending of
tradeshows to representatives.

2.
INVESTMENT

Booth $4000 which lasts for 30 shows.

This is an investment because it has a cost, useful life and depreciation.

Fixed costs associated per trade show

 Registration - $3000/show
 Promotional materials and samples of products - $2800/show
 Shipment of booth - $1500/show
 Tickets for travel for partners - $2000/show
Therefore, total cost per show sums up to $3000+$1500+$2800+$2000 = $9300.

In FY 2014/2015, there is an estimate of 10 tradeshows in which the partners would be

willing to attend. Thus the total cost per show for the year would be
$9300*10 = $93000
Depreciation (for 10 shows) would be equal to = $4000/30*10 = $1333.33
Total fixed cost = $93000 + $1333.33 = $94333.33

3.

If the tradeshows are not attended, the total available increased amount for the online
marketing campaign for FY 2014/15 would be $30,000 (which is the sum of registration of
10 shows).

4.
The variable cost associated with necklace and earrings are the same for both tradeshows and
online sales. The only thing that differs is the shipping cost. Since the shipping terms are
FOB, this is borne by the customers.

5.
For tradeshows, variable cost per necklace = $8.05 and variable cost per pair of earrings =
$5.50.

For the online sales channel, the variable cost would be the same as tradeshows but will also
include $1.05/per click on ad.

6.
Unit contribution = Sales – Variable cost

For necklace = $ 17 - $ 8.05 = $8.95

For pair of earrings = $12 - $5.50 = $6.50

Contribution margin rate = (Unit contribution/Sales) *100

For necklace = (8.95/17) *100 = 52.65%

For pair of earrings = (6.50/12) * 100 = 54.1%

Tradeshow

Sales

Item Calculation Total

Necklaces $17*25 $425
Earrings $12*12 $144
Total $569
 Cost
Item Calculation Total
Necklaces $8.05*25 $ 201.25
Earrings $5.50*12 $66
Total $267.25

Contribution margin per order = $569-267.25 = $301.75

Contribution margin rate = (301.75/569) * 100 = 53.03%

Online
Average online order:
Each order would consist of 2 necklaces and 1 pairs of earrings
Item Calculation Total
Necklace $34*2 $68
Earring $24*1 $24
Total $92

Contribution Margin ($ and %)

An order has 2 necklaces and 1 pair of earrings

Quantity Unit variable Unit Total variable Total Unit Contribution CM Rate
manufacturing sales manufacturin sales Contributio margin per
costs (per price g costs n (= Sales – order (=
unit) Variable Total sales –
Cost) Total
variable
costs)
2 necklaces $8.05 $34 $16.1 $68 $25.95 $51.9 76.32%
1 pairs of $5.5 $24 $5.5 $24 $18.5 $18.5 77.08%
earrings
Total per $21.6 $92 $70.4 76.52%
order

Contribution margin rate per necklace = (25.95 / 34) x 100 = 76.32%

Contribution margin rate per pair of earrings = (18.5 / 24) x 100 = 77.08%
Contribution margin rate per order = (70.4 / 92) x 100 = 76.52%
Weighted average contribution margin = (total sales – total variable expenses)/units sold

Tradeshow = (569-267.25) / 37 = 301.75/37 = 8.16 per unit

Online = (92-21.6) / 3 = 23.47 per unit

7.
Break-even units = Total fixed costs / Contribution margin per order

Break-even sales = Total fixes costs / Contribution margin ratio per order

For tradeshow

From answer number 2, Fixed cost = 94333.33

Contribution margin per order = 301.75

Break even units = 94333.33 / 301.75 = 312.62 orders

Break even in sales = 94333.33 / 53.03% = $ 177886.72

For online

Fixed cost = 93000

Contribution margin per order = 70.4

Break even units = 93000/70.4 = 1,321.02 orders

Break even sales = 93000/76.52% = $121,536.85

8.
The partners need their profits to increase by at least 100,000 for 2015.
Trade shows

Target profit units = (Total fixed costs + Target profit) / Contribution margin per order
= (94333.33 + 100000) / 301.75 = 644.0209 orders

Target profit sales = (Total fixed costs + Target profit) / CM ratio per order
= (94333.33 + 100000) / 53.03% = $366459.23

Online

Target profit units = (Total fixed costs + Target profit) / Contribution margin per order
= (93,000 + 100,000) / 70.4 = 2,741.4773 (orders)

Target profit sales = (Total fixed costs + Target profit) / CM ratio per order
= (93,000 + 100,000) / 76.52% = $252,221.6414

In terms of achieving their desired profits using units, it can be seen that trade shows achieve
this target by fulfilling fewer orders. However, when it comes to attaining this profit using
sales volume, it is seen that online sales distribution channel can achieve it using significantly
lower volume. Contribution margin per order using online channel is also significantly higher
than that of attending tradeshows. The fixed costs are also lower in online method and
generates a higher contribution margin ratio per unit. Therefore it can be said that the online
sales method will generate higher profits for Foxy in 2015.

9.
Calculations needed

Trade shows

Low estimate – 20 orders

Revenue from necklace = 25*17*20 = $ 8500

Revenue from earrings = 12*12*20 = $2880
Total revenue = $ 8500+$2880 = $11380 per show

We know that 50% of the retailers would reorder twice per year, therefore,

Total revenue per year from each trade show = $11380 + 1/2 * 11380 *2 = $ 22760 per show
In 2015 they will attend 10 shows. Therefore, total revenue = 22760*10 = $ 227600

High estimate – 45 orders

Revenue from necklace = 25*17*45 = $ 19125

Revenue from earrings = 12*12*45 = $ 6480

Total revenue = $ 25605

Since reorder rate is 50%, and there are 10 trade shows in 2015

Total revenue per trade show = 25605 + 1/2 * 25605 * 2 = 51210 per show and 51210 * 10 =
$512100 per year (i.e. 2015).

Margin of safety (high estimate) = Total sale – total break-even sales

= 512100 – 177886.7307 = $334213.28

Margin of safety (low estimate) = Total sale – total break-even sales

= 227600 – 177886.72 = $49713.27

Online

Number of visitors = 93,000/1.05 = 88571.43

Low estimate is based on orders coming from 3% of visitors

Number of orders = 3% * 88571.43 = 2657.1428 orders

Total revenue = 2657.1428 orders * $92 per order = $244,457.14

High estimate is based on orders coming from 5% of visitors

No. of orders = 5% * 88571.43 = 4428.5714 orders

Revenue = 4428.5714 orders * $92 per order = $ 407,428.57

Margin of safety (high estimate) = Total sale – total break-even sales

= 407,428.5714 – 121,534.0909 = $285,894.4805

Margin of safety (low estimate) = Total sale – total break-even sales

= 244,457.1429 – 121,534.0909 = $122,923.052

Based on the above quantitative and qualitative analysis throughout this report, it can be seen
that Ger and Chemel will achieve a better financial position for Foxy if they pursue sales of
their product using the online sales channel. This is because, the operating profits in both the
high and low projections using online sales is higher than that of attending tradeshows. The
margin of safety in both projections also give us favorable opinion towards the online sales
distribution channel. The partners risk losing their personal relationship if they follow the
online method and forgo the tradeshows, but they also have increased family commitments
which will be more balanced if they can focus on increasing sales through online sales. Thus
the decision is based and backed by both qualitative and quantitative comparisons and for the
betterment of both, the business and the partners.