Tubbs

TUBBS SNOWSHOE COMPANY

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 had bought one of the businesses he was asked to sell. The business—Stowe Canoe and Snowshoe Company, Inc.—was later renamed to Tubbs Snowshoe Company in recognition of the prominent role he hoped the snowshoe business would play in the future. In order to buy the business he had assembled a group of private investors, who over the course of several years had contributed to several rounds of financing.

He had managed to weather a very difficult year in 1992, where they lost approximately $300,000. But now in 1993 he faced a new set of challenges.

THE BUSINESS
The original business was the manufacture and sale of 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 1993, 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. All indications at the end of 1993 were that the earlier prognosis had been correct—the new aluminum snowshoes were taking the market by storm.

THE DILEMMA OF 1992 AND THE ACCOUNTING & INFORMATION SYSTEMS PROBLEM
1992 together with the first part of 1993 had been a very difficult time. During 1992, the shareholders had willingly provided $470,000 of new capital to finance the expansion into the metal snowshoe business. But by the end of 1992 that capital was virtually all gone. And the new snowshoe line was still a long way from being fully launched.

The budget for 1992 had called for an approximately $17,000 loss owing to the fact that the new line of snowshoes would be introduced. But by the end of the year, the $300,000 loss had more or less eaten 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. The financial statements for 1992, in condensed form, are presented in Exhibit I.

Ed could not have been in a more uncomfortable position. 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 he couldn't to go back to the shareholders and ask for more money from them until he could 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.

As luck would have it, Ed's path 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 had 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 updated the accounting and information system to provide gross profit margin information by product. And together, Phil and Ed had analyzed the actual results for 1992 against the budget, determined the variances and their causes, and devised corrective actions to be taken in 1993. Since virtually all of the variances were attributable to sales volume, product mix, and product costing problems, a great deal of attention was given in the accounting and information systems for product costing and control.

They created a budget and plan for 1993 that was virtually break even with a slight profit. They went back to the shareholders, presented the results for 1992, presented their analysis of the variances, and outlined their plans for 1993. Their planned budget for 1993, in condensed form, is presented in Exhibit II.

Their plans for 1993 included the continuation of the introduction of the new snowshoe line and made what they thought was a very compelling argument for the need for additional capital of approximately $400,000. Ed was convinced that they were poised to take the snowshoe market by storm; all they needed was a little more capital. He tried to convince the shareholders of this. Phil was convinced that they would be out of business if they didn't get some new capital and get it soon. He tried to convince the shareholders of the seriousness of the situation.

While the shareholders were not particularly pleased that the nearly half a million dollars of fresh capital that they had contributed in 1992 was gone, they reluctantly agreed to contribute another $400,000 to protect their previous investments and see the launch of the new snowshoe line to completion. This did not come without tough questions put to both Ed and Phil. As Phil put it, "We got beat up pretty bad."

THE DILEMMA OF 1993
At least one of the shareholders suggested that if they really believed that the snowshoe business was the key to their future, why not sell the canoe business in order to free up more capital. Ed was reluctant to part with this part of the business. After all this was the original business he had bought. And the whole idea of adding the snowshoe business to the canoe business was to have two seasonal products—one for the winter and one for the summer. The suggestion of selling the canoe business seemed to fly in the face of this logic. And Ed still felt that with a little bit of time, he could bring it around to be a vital part of their overall business.

By the end of 1993, they had beat their plan with an approximate profit of $73,000. They had a reasonable cost accounting system in place and they experienced a favorable overall variance in manufacturing costs. The new snowshoe line was contributing revenues greater than the canoe line and seemed to be poised for further growth.

Ed had to make a decision. Certainly he could always use more capital. But he wasn't ready to give up on the canoe business just yet. And the balance of two products for two separate seasons seemed to have a certain logic. Yet several shareholders, successful business people in their own right, had argued very strongly that the canoe business should be sold. Maybe if he just had some more capital he could make the canoe business work.

QUESTIONS
Financial Accounting Issues

1. Assume you are the independent CPA for the company. Ed and Phil have described the shareholders' suggestion regarding sale of the canoe business. You have been a trusted business advisor to Ed for many years. He values your opinion. What would you recommend?

2. Independence is the cornerstone of the public accounting profession. This generally means that the CPA will not get involved in management decisions. What role do you think an independent CPA can play as a business advisor to small businesses like Tubbs?

Management Accounting Issues

1. Assume you are Phil McKinnis. Ed admits to you that he is having a hard time viewing the decision to sell or not sell the canoe business objectively. He asks you to prepare an analysis. Assume that the net sales will increase in 1994 by approximately $1,200,000 over 1993. If the canoe business is not sold, $200,000 of that increase will be attributable to the canoe business and the balance will be attributable to the snowshoes. If the canoe business is sold, net sales will still grow by the $1,200,000 in total. The snowshoe business will grow by $1,200,000 plus the $520,000 necessary to replace the 1993 net sales from the canoe business. Selling, general and administrative expenses will also increase by approximately $30,000 in order to support the increase in sales. Prepare a comparative analysis of the two possibilities.

2. Ed has asked you for your recommendation. Based on your analysis prepared for question 1 above, and the other factors such as seasonal balance, market conditions, manufacturing issues, and the like discussed in the case above, what would you recommend? Support your answer with a discussion of some of the operational issues discussed in the case, the product gross profit analysis provided in Exhibit III, as well as your comparative analysis prepared for question 1.

Copyright 1996 by the American Institute of Certified Public Accountants (AICPA). Cases developed and distributed under the AICPA Case Development Program are intended for use in higher education for instructional purposes only, and are not for application in practice. Permission is granted to photocopy any case(s) for classroom teaching purposes only. All other rights are reserved. The AICPA neither approves nor endorses this case or any solution provided herewith or subsequently developed.