Case of Killer Squid Blades - Business Advice (920 words)

Killer Squid Blades Our story begins one fateful afternoon when Jimmy Post received phone call from one of his very best customers, Ben Logan. Ben called complaining that so many of his competitors were now selling Killer Squid Blades and it was becoming impossible to support the product. All the local competitors in Saskatoon were making it impossible to make profit. He was very sorry but he felt that his store was likely going todrop the Killer Squid Brand enough they really loved the products. Ben's store had been an exclusive carrier of Killer Squid Blades in Saskatoon since 2010 and one of Killer Squid' very first customers. Ben's support had been important in the growth and survivalofK Killer Squid through their first three years and Uimmy was very concerned about this potential defection. Killer Squid was almost becoming victimoo its own success. The Killer Squid Blades had become so successful across Western Canada that retailers were contacting them every day to order their product line. Jimmy was starting to worry that Killer Squid Blades had reached market saturation. If they continued to grow in Western Canada he was certain that some of his very best customers would start leaving. One ofthe great successes of the Killer Squid brand was its exclusivity and the more stores it was available in the less "cool' the product lines became. But how could Killer Squid grow without more retailers. Thus the dilemma that kept Jimmy awake at night. History of Killer Squid Jimmy Post and his best friend Jim Candy had grown up in Calgary partying and adventuring through their teen's barely surviving high school. The problem was not smarts but rather their commitment to school. The two "Jims" wanted adventure and could barely tolerate sitting in class listening to boring math theorems. The day before graduation they left note with their respective parents saying "Gone with Circus" and bolted for parts unknown. Five years later having seen most of the uncommon world sights they returned home to Calgary for theirnext big adventure During their travels they had developed a pure Canadiar business idea to combine skating and snowboard ding and thus became the seed for the idea of Killer Squid Snow Blades. Beginning in 2010 they launched their first product line working day and night putting on demonstrations at Banff ski hills and twisting the arms of local retailers. Their big break carne when movie producer watching a demonstration at Whistler Mountain Resort decided to use their Snow Blades in 2012 James Bond movie "Quantum of Snow". From there the products took off and now they had expanded into Turf Blades used in the summer months Killer Squid' two product lines Snow and Turf now covered all four seasons. As the company grew the company attracted additional retailers by offering market exclusivity. The relationship took long time to develop and the travel and partying started to take toll on the two "Jims" In 2013 Jim Candy told limmy that he had had enough and handed in his office keys and left for parts unknown never to be heard from again. Jimmy almost losti but through support from excellent retail friend: including Benin Saskatoor he battled through and today at the end of 2015 he has strong and powerfu Ibusiness of Financial Statements 2015 Year ended September 30, 2015 Revenue $ 2,025,000 Variable Costs 975,000 48.1% Gross profit 1,050,000 Fixed Costs -overhead and administration 345,000 Selling and Marketing Costs 125,000 Total fixed costs 470,000 NE operations 580,000 Interest 30,000 NE before tax 550,000 Income tax expense 137,500 NE afterta $ 442,500 22% Note to Financial Statements (unit costs and cost details) Blades Turf Total Average Sales Units 1500 2000 3500 Price $450 $675 $ 578.57 Costs Variable Costs $250 $300 $ 278.57 CM $ 300.00 Fixed Costs $345,000 Selling and Marketing Costs $125,000 Total R FC $470,000 Debt 6% Rate $ 500,000 Tax rate 25% 3 Company Future Jimmy has spoken with his best retail customers and some valued advisors and believes he faced with some serious decisions in the immedi ate future 1. To protect his current market and to keep his strongest retailers in Western Canada Killer Squid is going to have to terminate relationships with about ten (10%) percent of his current retailers. This will obviously drop his current sales but it will build and re-entrench the strong relationships with his best customers. The approach will be to offer local market exclusivity to the very best retailers thus stopping any future market erosion. 2. Any market expansion can come from either US market expansion or Online retailing around the globe. 3. US market expansion has some costs; us Expansion Commissions 15% Expansion Costs annual $ 450,000 Expansion Costs one time start up $ 100,000 The commissions are paid to regional distributors that have current retailers in similar target markets throughout Western United States (l.e. Colorado, Utah and California). The contribution margins earned by Killer Squid are anticipated to be the same across the current product lines. Jimmy can access his business line of credit for the startupexpansion costs and working capital needs. The projected sales for the US expansiona are .500 units wit hintwo years. 4. Online retailing has some different costs; Online Expansion Commissions 5% Expansion Costs annual $ 75,000 Expansion Costsone time start up $ 50,000 The commissions are paid for online transaction fees. The contribution margins earned by Killer Squid are anticipated to be the same across the current product lines. Jimmy can access his business line of credit for the startup expansion costs and working capital needs. The projected sales for the Online retail expansion are 1,000units withir two years. Required Killer Squid and Jimmy have asked for some numeric advice with respect to his expansion options. They are going to start dropping retailers within the next two months and he wantsto know which expansion option to undertake Jimmy also looking for any general business advice that you may be able to offer as accounting professional.