Academic journal article Journal of the International Academy for Case Studies

New Product Innovation at Chet's Fan Manufacturing, Inc. (CFM)

Academic journal article Journal of the International Academy for Case Studies

New Product Innovation at Chet's Fan Manufacturing, Inc. (CFM)

Article excerpt

CASE DESCRIPTION

The primary subject matter of this case concerns the application of target costing, an accounting approach applied during product or process design. Secondary issues examined include using activity based costing data during product and process design, applying entrepreneurial thought and action principles, and pursuing entrepreneurial opportunities within an established organization. The case has a difficulty level of three. The case is designed either to be taught in one and a half class hours and is expected to require about 3 hours of outside preparation by students or in two 75 minute classes with less than 2 hours of outside class preparation.

CASE SYNOPSIS

CFM, established to manufacture and distribute ventilation equipment, was known for superior products, dependable service, competitive pricing, and custom fans. Initially CFM's sales were to original equipment manufacturers of industrial and commercial fans. Seeking growth, CFM entered the residential market with standard fans and blowers to exhaust bathrooms, laundries and kitchens. These products were sold to builders through major wholesalers in Canada and the US. The quality of CFM's products caused Home Depot to offer the company a two year contract for 40,000 basement ceiling fans, sold under Home Depot's brand, and exclusively in their stores.

With adequate capacity, CFM's managers must determine how to design and produce this new product to satisfy both Home Depot and CFM's requirements. Home Depot's customer specifications must be met at a retail selling price of $150, with a 30% gross margin to Home Depot. CFM must earn its required profit margin, which would be impossible without considering cost during design.

This case about a fictitious company and transaction provides students an opportunity to use target costing as an analytical tool for entrepreneurial creation and prediction. Students experience the entrepreneurial concepts of affordable loss, enrolling stakeholders, and working with the means at hand as they suggest ways that profit and cost targets can be met. Through the case, students experience some of the organizational complexity of shaping an entrepreneurial opportunity within an established organization. Students apply target costing's principles from the initial product concept through the design of product and its manufacturing process. They develop an estimate of the product's cost using activity based costing information and a value index. The case also allows students to consider cash flow consequences of growing sales. Earlier versions of this case have been used successfully in undergraduate planning and control courses at the junior level.

NEW PRODUCT INNOVATION AT CFM

BACKGROUND

Chet's Fan Manufacturing Inc. (CFM) was established in 1992 as a US based minority owned business that would design, manufacture and distribute quality ventilation equipment. CFM was known for its superior products, dependable service, competitive pricing, and an engineering department that designed custom fans. Competitive pricing was accomplished by manufacturing in Thailand, and superior design and dependable service was accomplished by domiciling other operations in the US, close to the customer base.

Since its inception, CFM's sales were to original equipment manufacturers for industrial and commercial fans. After two decades of slow growth, CFM entered the residential ventilation market with standard fans and blowers for bathroom exhaust, kitchen range hoods and laundry ventilation. Instead of selling these to original equipment manufacturers, these fans and blowers were sold to major wholesalers of home building supplies in Canada and the US. By entering this new market, CFM pursued sales revenue growth and finally achieved $100 million of sales.

THE OPPORTUNITY

As a result of their expansion and CFM's reputation for quality ventilation solutions, a buyer from a major US "big box" retailer in the home improvement and building market, Home Depot, approached CFM at a trade show to design and manufacture a heavy duty yet attractive ceiling fan for use in basement renovations where air circulation is poor. …

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