Sagacity Tea simplified Income Statement for 2017 

Revenues (97,542 cases @ $25.63/case) $2,500,000

Cost of Good Sold (40%) 1,000,000

Logistics (3.5% of sales less distributor fees) 79,650

Distributor Fees (25% of 35,000 cases sold to health food stores) 224,262

Advertising 14,400

Sales, General and Administrative (includes e-commerce support) 750,000

Income before taxes 431,688

Annual sales= 2.5 million

18 billion annual cost in US

Premium shelf space for new food and product in the 50 largest us chains more than 5 million

Off invoice case allowance ave 15.1% unit cost

About 4,875 cases 5% of sales purchased from sagacity own website

Typical retail markup of 25-30% sold for 2.60 to 2.75 bottle

In addition , the company used a guerrilla marketing device upon entering a new town or city: a five-foot-tall Sagacity Tea "bottle," which was placed on a busy shopping street and dispensed small samples under the sign "Have Sagacity!" This effort had reliably generated local media coverage and social media buzz at the modest cost of about $ 1,000 per event.

He also hosted a popular monthly Facebook Live event featuring health food experts and tea enthusiasts, in return for the guests linking Sagacity's page to their own. Thanks to such initiatives, the company had achieved a strong organic social media presence with advertising expenditures that rarely exceeded $1,200 per month.

Moran estimated sales of 10,000 cases in the new region during Sagacity's first year. She felt this estimate was conservative given the average annual sales of 205 cases at each of the brand's 450 existing retail outlets (excluding its own website ), taking into account that most of these stores were small and had increased their Sagacity sales over a decade.

Shields's specific demands included: $10,019 in slotting fees, to be paid in the form of one free case of Sagacity Tea per variety per store $100,000 in mobile dollar-off coupons $1,000 per month for six months to cover introductory marketing or " pioneering expenses Retailer discounts, to be paid in the form of off-invoice case allowances during the peak sales months of June, July, and August (The number and value of these discounts were subject to negotiation, but the average allowance across the total CPG marketplace was 15.1% of wholesale cost.24) 5% commission on the net invoiced price of each case sold In return for these expenditures, the broker would attempt to secure shelf space in 300 key outlets of a leading regional supermarket chain.

Moran had initially assumed Sagacity would also use in-store sampling, given its past success for the brand. But at $300 per session, sampling in only 150 outlets would cost $45,000. At the wholesale price of $25.63 per case, this expense meant Sagacity would need to sell nearly 3,000 cases just to cover the costs of slotting fees (10,019), coupons (estimated cost $12,000 given the average 12% redemption rate for mobile coupons), pioneering outlays ($6,000), and this limited sampling program.25 Sagacity would also need to fund at least a modest introductory advertising effort, at an estimated cost of $3,000 per month for targeted online ads during the rollout's first six months. The broker was also pressuring Sagacity to introduce a fourth variety of tea within six months: matcha, a popular Japanese green tea that was catching on quickly in the United States because of its health benefitsBenton agreed that this introduction would enhance Sagacity's shelf presence , but he estimated it would cost approximately $10,000 to develop.

Sagacity's Alternatives Each alternative to accepting the broker's program had advantages and disadvantages Focus on online distribution and promotion. Sagacity had long maintained its own online store. It had initially invested $6,000 in software and web design and paid $2,500 per month for technical support. It also employed a part-time staff of four to handle customer service, orders, and fulfillment . Further development of its e- commerce capability -especially as a substitute for expanded distribution through physical storeswould require additional investment to improve the functionality of its site and to expand and sustain online advertising on Google AdWords, the largest and most popular platform. The average small e -commerce enterprise spent $ 9,000-10,000 per month on Google AdWords.27 Benton was enthusiastic about this approach, which was estimated to account for about 20% of the sales of some national loose leaf and tea accessory sellers, like DAVIDSTEA Other regional RTD brands such as Role Tea were following this path. Moran could take two steps to minimize online expansion costs, though each had drawbacks: 1. Advertise primarily on Facebook (1.72 average cost per click CPC) instead of Google AdWords ($2.32 average CPC)However, consumers browsing on Facebook generally showed less intent to purchase than those searching for specific products or brands on AdWords 2. Replace Sagacity's glass bottle with an unbreakable material like plastic, or with aluminum cans. This change would reduce shipping costs but might alienate core customers Moran also feared that online customers would expect Sagacity to make its products available on Amazon, particularly given Amazon's acquisition of Whole FoodsAt least two competitive brands- Pure Leaf and Honest Tea-had already introduced Amazon Dash Buttons, an indicator of heavy usage of the site by buyers in the category . Taking that step would expose Sagacity to stiff price competition and could force it to cut its current margin, thus weakening its premium image and regional appeal. In fact, the buyer for a chain of "Made in Vermont" specialty stores had often said her customers loved Sagacity "because it isn't available to the whole world on Amazon" Significant e-commerce expansion would also strain Sagacity's fulfillment capacities, which handled its present requirements but would need to be scaled or outsourced. The cost estimates that Moran solicited for contracting with third-party logistics providers averaged about 10% higher than Sagacity's current expenditures on storage , packing, and shippingthese costs fell within the industry average of 3-5% of net sales

based on this info can you calculate the income statement to accept the brokers proposal, at least in the short term focus on online sales by enhancing sagacity website and e advertising presence , or continue sagacity successful regional efforts for the time being with the goal of achieving deeper market penetration. Use an income statement or break-even calculations to compare across options.

• Remember that (product) cases given as slotting fees do not generate revenues. The company however has to incur cost in producing and shipping these cases.
• If you are given a range of values, it would help to consider the best-case and worst-case scenario.