PROJECT DETAILS

Exclusive Fognini Inc. (EFI) is a family-owned business specializing in high-end customized skis. Giulio, a remarkable engineer, is the majority shareholder and president of the company. The balance of shares is owned by three family members. Giulio founded the business 15 years ago. His wife, Haley, was a professional skier at the time, and she attributed the gold medals she won to the highly innovative skis her husband had built for her. The market for high-end, customized skis presented an unmet demand, and Giulio took advantage of that opportunity. Operating just outside of Vancouver, EFI produced strong sales numbers even within the first year. The skis were priced to sell at a large premium, and the company made significant investments (initial and ongoing) in research and development. EFI turned a profit in its third year and has achieved strong results since that time. The company's controller is a young CPA who joined EFI soon after receiving her designation and has grown with the company. Financial statements are prepared in accordance with ASPE and are reviewed by JK&L CPAs, a three-partner CPA firm in Vancouver.

EFI does not invest in advertising but relies instead on word-of-mouth referrals. Giulio offers his wealthy clientele not only highly customized skis with a guaranteed exclusive design, but also the highest quality available on the market. In addition, microchips are embedded in each ski to make them easy to locate in case of loss or theft. The company offers a unique level of personalization and free maintenance at the beginning of each ski season; this has won over many prospective clients. Giulio's brother, Antonio, took on the responsibility for the maintenance service and has kept customers happy over the years

Giulio's brother-in-law, Marcus, is an EFI shareholder and the ski instructor of choice for wealthy skiers in Whistler, B.C.; and Aspen and Vail, Colorado. Marcus has spent his career as a ski patroller, medic, and instructor. He devotes a few days to each client or group of clients and travels between the three resorts as frequently as required, all while promoting EFI skis to his clientele. Each December, Giulio and Haley travel to the famous ski resorts of Europe, where they introduce new designs to powerful sponsors and selected clientele. The couple invites those clients who purchased new skis or recommended the new skis to a buying customer to an annual spring skiing event in Whistler, which is sponsored by EFI. The event provides EFI's customers with an opportunity to show off their prized possessions the exclusive skis and to enter into new business relationships, all while enjoying the outstanding Whistler-Blackcomb ski terrain and upscale hospitality

In recent years, EFI has continued to achieve strong and stable sales levels, but the growth rate has slowed. Giulio has begun to look for ways to expand the business and take advantage of new opportunities. Giulio's ultimate goal is to take EFI public in a few years, after which he wants to stay with the company for a few more years before retiring. Performan

Given his goal to take the company public, Giulio has started looking at the changes he should make to EFI's governance structure. Currently, the board comprises the following members:

Giulio, as chair

Haley

Marcus

Giulio's father, Arrigo Arrigo owns 10% of EFI but is not involved in day-to-day operations. He is a wealthy retired businessman who immigrated to Canada as a young adult. He had been a farmer and cheese maker in Italy and was disappointed with the lack of variety in Canadian cheeses, so he began an importing company to bring European cheeses and other specialty foods to Canada.

The board meets twice per year, and board meetings are combined with other family events. One meeting is held to review and approve the year-end financial statements, and the other meeting is a spring planning session. The board members are in frequent contact, so board meetings do not require a formal agenda. There are no board committees at this point, as the board is small enough to make all decisions efficiently as they arise

As one option for growth, Giulio's daughter, Lucia, who specializes in accessories design, has proposed that the company diversify into silk and leather ski masks and gloves, which would follow EFI's tradition of exclusive design, high quality, and personalization. The accessories would carry a high unit cost, but Lucia sees launching the new products as an indirect but excellent investment in advertising for the core of the business, the skis.

Question :

EFI has a basic customer relationship management (CRM) system in place, and one of its features is the ability to gather and analyze customer feedback very efficiently. Recently, a number of customers have inquired about EFI making a line of skis for young children who are just starting out on the ski hills. Further research obtained through customer surveys indicates that a significant portion of the existing clientele have small children or grandchildren and up to 10% of the existing clientele would likely purchase EFI skis for a child in the family if the following conditions applied: The skis have training features that could be removed once an appropriate skill level has been reached.

The skis do not cost more than $1,000 per pair.

The skis have the same level of quality and durability as skis EFI produces for adults.

Most customers surveyed were willing to forego some of the individual engineering on the skis and use a standard setup, as their children would not yet have developed their own unique style and would need a solid all-around performing ski.

Giulio and the board have decided to explore the idea for a line of children's skis, which they would call Kinderskis. EFI will pursue the Kinderskis product line as long as it can be expected to generate a 30% profit margin on sales, as this is the level needed to meet EFI's required return on investment (ROI), based on the level of anticipated demand. The design team has determined that the investment needed to adjust the production processes and equipment would be fairly minimal, but the new designs would require an investment of about $400,000. Once the designs are complete, each pair of skis could be produced for about $850. The current design plan calls for the following specifications to be designed into the Kinderskis:

top quality materials, equivalent to those used in the adult ski lines

varying levels of rigidity and edge shapes to allow customers to choose skis based on the snow type usually skied (powder versus groomed runs)

a removable attachment that holds the tips together while the child learns to control the skis

custom artwork to signify that the skis are part of the EFI brand

Required:

a) Calculate the target cost for the Kinderskis. (1 mark)

b) How should EFI proceed in light of information obtained from the target costing process? Consider investment, cost, and demand factors, and justify your guidance to EFI by relating the target costing perspective to EFI's mission, vision, and values. (13 marks)