| back to Acct. 515 AICPA Case Development Program |
Case No. 9548- Stowe Canoe and Snowshoe Company, Inc. |
STOWE CANOE AND SNOWSHOE COMPANY, INC. Dennis W. Voigt, Assistant Professor Saint Michael's College, Colchester, Vermont Michael D. Flynn, Managing Partner Gallagher Flynn & Company, Burlington, Vermont |
|||||||||||||||||||||||||||||||
| BACKGROUND After many years of helping entrepreneurs sell their successful businesses, Ed Kiniry finally decided to take the plunge and buy one of the businesses he was asked to sell. The business—Stowe Canoe and Snowshoe Company, Inc.—seemed simple enough. He could probably assemble a group of private investors, buy the company and manage it on a part-time basis while he continued as a business broker. He did assemble a group of investors and he did buy the business. But things did not turn out exactly the way he planned. By the end of 1992, he had been working full-time in the business for some time, he was just beginning to launch a new line of lightweight aluminum snowshoes, and despite two recent rounds of investments by his private investors he was just about out of capital. He was probably thinking to himself, "So this is what it's like to own your own business;" and "Now, what do I do?" THE BUSINESS The original business was to manufacture and sell canoes. Along the way, the Tubbs snowshoe business was added. The snowshoe business brought with it a line of snowshoe furniture. By 1992, with the introduction of the new Tubbs' lightweight aluminum snowshoes and their innovative binding/crampon system, it appeared that the snowshoes just might become the dominant segment of the business. This somehow seemed fitting. Founded in 1906 in Norway, Maine, by Walter F. Tubbs to manufacture ash snowshoes, skis, sleds and snowshoe furniture, Tubbs has a long heritage of opening new frontiers. Individually crafted by skilled woodworkers, Tubbs snowshoes carried Admiral Byrd on his expedition to the South Pole. The introduction of the aluminum snowshoes marked a potential change in the manufacturing processes as well. While the wooden snowshoes and the canoes required a hand-crafted manufacturing process subject to the whims of wood and the effects of weather and humidity changes, the aluminum and other modern materials used in the metal snowshoes proved to be much more predictable and adaptable to a more automated manufacturing process. THE MARKETS By 1992, the market for canoes, particularly premium canoes was rather crowded. Margins were shrinking and new customers seemed more inclined to purchase the less expensive, lower margin canoes. Snowshoes, on the other hand, seemed to be enjoying a renaissance of sorts. While snowshoe sales, in general, were growing, there were also early indications that the new aluminum snowshoes just might revolutionize the market and introduce a whole new group of enthusiasts to this winter sport. THE DILEMMA OF 1992 Just when the prospects for the future seemed to be brightening, there were still storm clouds on the horizon. To capitalize on the opportunities that the new aluminum snowshoes seemed to promise, would require capital. The shareholders had willingly provided $470,000 of new capital during 1992 for that purpose. But somehow things went desperately wrong in 1992. The budget for the year called for an approximately $17,000 loss owing to the fact that the new line of snowshoes would be introduced in 1992. But by the end of the year, the company had suffered a whopping $300,000 loss—more or less eating up all of the new capital that had been provided for the expansion. To make matters worse, it was not immediately clear from the accounting and information system what went wrong. Selected data from their 1992 financial statements are presented in Exhibit I. Ed was now in a fairly uncomfortable position, to say the least. He needed capital desperately. He knew something big was about to happen in the snowshoe market and he just had to be there to capitalize on it. But he couldn't go to the bank. And how could he go back to the shareholders and ask for more money from them? And more importantly, how could he figure out what happened in 1992—not just to be able to explain it to the shareholders, but also to make sure that it didn't happen again. He needed some answers and he needed them very fast. THE ACCOUNTING & INFORMATION SYSTEMS As fate would have it, Ed's path soon re-crossed with a CPA by the name of Phil McKinnis. Ed had helped sell an inn that Phil owned and managed at a nearby ski resort. While owning and operating his own business, Phil had developed some elaborate systems for managing the business and controlling costs. Ed remembered that these systems and the financial success of the inn had been impressive. It turned out that Phil was filling his days by working as a consultant—sort of a management accountant/controller for hire. With a little coaxing, Phil agreed to try to help. What Phil found was an accounting and information system that was simply not up to the task of providing timely and accurate financial information—particularly for their changing situation. While they knew what materials went into each product, they did not have a good idea of what their costs were. And because of the way that certain indirect costs and overhead were accounted for, it was very difficult to determine what the relative gross profit margins were for each product line. Phil analyzed the financial statements for each month of 1992 and reconstructed cash flow statements for each month as well. He put together a make-shift manual cost accounting system. And together, Phil and Ed analyzed the actual results for 1992 against the budget, determined the variances and their causes, and devised corrective actions to be taken in 1993. According to their analysis, very little of the variance was attributable to problems in the selling, general and administrative expense categories. Virtually all of the problems were attributable to sales volume, product mix, and product costing problems as follows:
|
|||||||||||||||||||||||||||||||
| back to Acct. 515 |