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Executive Summary

F
oxy Originals(Foxy) is a Canada based jewelry company who offered high style and

high quality designs at an affordable price point and targeted women between the

ages of 18 to 30. The company has been really successful in Canada from the day

it founded by Jen Kulger and Suzie Orol. Now, in 2004, with efficient internal funding, the two

partners are thinking about expand their business to the U.S. market due to the limited market

capacity in Canada. The U.S. market is 10 times larger which, we believe, will give them great

opportunity to further develop the business, enhance their product design and boost the

company’s brand image. However, the U.S. market is quite different in terms of the tastes for

jewelry, it might take Foxy some time and there might incur some launching costs such as

SGA expenses for the company to adapt to the different appreciation between the American

and Canadian customers. Based on the analysis of the pros and cons, set aside the

manufacturing capacity issue to future, the partner believed it’s worthwhile taking the risk to

enter into the U.S. market.

The problems and value propositions

The problems in hand now are to decide on the best method of distribution----attending trade

shows, hiring sales representatives or both, and to evaluate the associated cost & benefit

behind the alternative strategies.

Trade Show

Trade-show distribution strategy is a good opportunity for the partners to learn about the

market trend and customers’ preference; this information would facilitate the decision making
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processes on positioning their products, new product design as well as benchmarking

strategies. However, embedded in this strategy is higher fixed costs but lower variable costs

[Exhibit 1] compared with Sales representative strategy. In addition, the 5 days preparation

and 3 days presence for one trade show could be a huge opportunity cost since the partners

could use their time elsewhere more important like overall business strategy or company

structure design, etc.

Sales Force

Sales representative’s distribution strategy is another alternative which is to develop a sales

force in the key fashion hubs (NY, Chicago, LA and Dallas) in the United States. This strategy

would enable the company to penetrate into the U.S. market more quickly by taking advantage

of the established sales channel and connections of the salesmen or saleswomen. But the

partners also knew that it could be very difficult to find the suitable personnel for those

positions, as this hidden cost is hard to quantify, we simply ignore it when we do the cost

analysis. The cost & benefit analysis [Exhibit 2] shows that this strategy has much lower fixed

costs while with higher variable costs incurred from the commissions for sales representatives.

A Combined approach

A further breakeven analysis [Exhibit 3] for the two strategies reveals that the breakeven point

for the second alternative is much lower, and a profitability projection also shows that the

representative strategy would generate more revenue for Foxy. However, neither trade show

strategy nor sales force approach would generate enough profit to meet their expectation of

$100,000. A solution to meet this target profit would be execute both strategy at the same

time, however, the territory

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ownership between sales representatives and trade shows is always a concern which needs

further quantitative analysis with proper assumptions to be justified as a short-term practice.

Assume that the company will pay representatives for the spillover sales in the 4 major cities

and there will be no cannibalization between trade show and sales force, we could calculate

the expected profit for the combined strategy. As show in [Exhibit 4], the combo would bring in

$165,186.5 for the first year which is much higher than the target. However, this combined

strategy would also bring in more risk in terms of larger investment.

Recommendation

Based on our qualitative and quantitative assessment, we would like to recommend that the

partners pursue both the trade show and the sales force.

For the jewelry industry, we believe the exposure to customers is very important to penetrate

into a new market, by taking a combo strategy, Foxy would establish their customer basis very

quickly in the U.S. market, at the same time, this strategy would also enable the partners to

“test” their product in the trade shows, capture new trend and make adjustment to better fit the

customers’ requirements.

The target $100,000 is another reason to justify our recommendation. Required return on the

expansion is really critical because we would only take those projects which enlarge the

marginal value of the company. This required return could also be treated as an opportunity

cost that we have to take into account when we do the cost & benefit analysis.

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[Exhibit 1]

Costs for the trade-show

- Expenditures depending on # of trade shows

Registration cost $3,000 per show

Shipping cost $1,500 per show
Travel cost $2,000 per show
Product sample cost $2,800 per show
Total $9,300 per show
Foxy planned to attend 10 shows, so total cost per year would be $93,000 ($9,300*10).

- Expenditures for one time investments

Cost for trade show booth

$4,000 ($133 per show)
(It can be used for 30 times)
Total Fixed cost would be $9,433 (=9,300+133) per show and $94,330 per year.

Contribution margin from the trade-show

Variable Contribution Margin CM ratio

Product Sales
Cost (=Sales – Cost) (= CM / Sales)
Necklace $17 $8.05 $8.95 0.5265
A pair of earrings $12 $5.5 $6.50 0.4583

For each order, Foxy would sell 25 necklaces and 12 pair of earrings, and would pay $15

of shipping cost. Therefore, total variable cost and weighted average contribution margin

for an order at a trade show is calculated as following:

Total variable cost

8.05×25+5.50×12+$15.00 = $282.25
(Answer for Q6)
Weighted average contribution margin
8.95×25 + 6.5×12 –$15 = $286.75
(Answer for Q7)

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[Exhibit 2]

Costs for the sales representatives

- Expenditures depending on # of sales representative

Rental space cost for 12 month $2,400 per representative

Sample boards cost for 1 year $2,900 per representative
Catalogues cost for 1 year $600 per representative
Total $5,900 per representative
Foxy planned to hire 4 representatives, so total cost per year would be $23,600 ($5,900*4)

- Other expenditures

Cost for hiring

for 48 hours $1,920 Per year
bookkeeper
Total Fixed cost would be $25,520 (=23,600+1,920) per year

Contribution margin from the sales representative

Contribution
Sales Variable CM ratio
Product Margin
(85%) Cost (= CM / Sales)
(=Sales – Cost)
Necklace $14.45 $8.05 $6.4 0.4429
A pair of earrings $10.20 $5.50 $4.7 0.4608

Therefore, total variable cost and weighted average contribution margin is as following:

Total variable cost

8.05×25+5.50×12+15.00+ 85.35* = $367.6
(Answer for Q6)
Weighted average contribution margin
6.4×25 + 4.7×12 – 15 = $201.4
(Answer for Q7)
* Total commissions per order: $85.35 = 0.15× (17×25+12×12)

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[Exhibit 3]

Breakeven # of order for each strategy

Breakeven # of order = Annual fixed cost / contribution margin per order

Breakeven # of order for the trade-

= 94,330 / 286.75 = 329 orders per year
show
Breakeven # of order for the
= 25,520 / 201.4 = 127 orders per year
representatives
(Annual fixed cost for each strategy is shown in Exhibit 1and 2)

Expected profit from each strategy

Profit = Contribution Margin per order × Total # of order – Fixed cost

Total # of order is estimated as following

Ave Order per Total # of

Min Max Reorder # of units
. units order
Trade 650 per
20 45 32.5 32.5 65 per show 10 shows
show year
12.5 per 12×4 600 per
Sales Rep. 10 15 12.5 0
month months year
Expected profit from the trade show = 286.75 × 650 – 94,330 = $92,057.5
Expected profit from the representatives = 201.4 × 600 – 25,520 = $95,320.0

Assumption: In the case, we assume that the order volume would be average of minimum
and maximum estimation. We do know that the profit from trade show strategy has larger

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variability. However, we don’t know the risk preference of the company; so, we based our
calculation on average order number.

[Exhibit 4]

If we launch both strategies, contribution margin per order would be different between trade

shows, held at the cities in which sales representative works, and other trade shows. The

calculation of the total profit would be as following,

Contribution
# of order Fixed Cost Profit
margin
Trade show $286.75 390 $56,598 $55,234.5
Trade show for 4 cities 260 $37,732 $14,632.0
$201.40
Sales representative 600 $25,520 $95,320.0
Total $165,186.5

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