Target Costing, Version 1.

Solutions to Assigned Homework

1. Self-Test Questions
b. The six principles of target costing are:
 Price led costing, target costs are established by first determining a competitive market price and
then subtracting the required profit margin from it.
 Customer driven in that customer requirements about product quality, price and time guide cost
analysis.
 Design of product and processes is the key to cost reduction efforts. Target cost systems design
products and their manufacturing and delivery processes using “concurrent engineering.”
 Cross-functional product teams with members representing design and manufacturing engineering,
sales and marketing, material procurement, cost accounting, service and support typically are
jointly responsible for attaining target costs.
 Life-cycle costing that considers all costs of owning a product over its life, such as purchase price,
operating costs, maintenance and repairs, and disposition costs are central to target costing.
 Value-chain members such as suppliers, dealers, service, and support are part of the target costing
process and help to focus cost reduction efforts throughout the value chain.
c. Nearly 80% of the costs of many products are committed at the design stage. Therefore, the
best opportunity to reduce costs is during design and not after a product is being manufactured.
d. Target market price can be set in many different ways depending upon the nature of a product
and the type of competition in the market place. Some common methods are;
 Last year model plus value of new features added
 Price that will provide a desired market share
 Price that will give a firm a price advantage over its competitors for a certain number of years
 Relationship of price to attribute and change prices as the physical attributes of a product change

j. To a customer a product such as a radio is a set of features such as clarity of FM reception,

sound quality of speakers, size, portability, alarm-clock, and other features. To an engineer, the
radio is a set of functions such as chassis, circuit board, resistors, capacitors, cone, antennae,
clock timer, a display panel, a frequency analyzer, and so. For a product to be meet customer
expectations, we must map how each function to a feature and set a target for that function that
an engineer can design to.
k. A well executed target cost process sets simultaneous targets for quality, cost and time. Quality
targets are set with reference to customer features, cost is implicit in the allowable cost target, and
development time is usually another objective for product developers.
l. Concurrent engineering means that products and their manufacturing processes are designed
simultaneously. Costs are reduced because we do not have time consuming and costly changes
after a product goes into production. For example, in construction, architects often draw a
structure that cannot be built because it cannot meet engineering standards for shear or lateral
forces. This means construction must stop and a new way to construct must be determined.
Target Costing, Version 1.1—page 1 of 3
Because, a number of elements are already in place, the new changes may cost more than the
previous changes.

3.
The answer depends upon the weight we assign to the three components. If we put the same
weight on all three components, then the ROS will be:

(.33 x 11%) + (.33 x 14%) + (.33 x 16%) = 13.67%

4.
1) Material costs down, assembly labor down, transportation in on materials down,
delivery cost down since one person can carry the dishwasher, and perhaps price goes
down if customer perceives a PVC tub to be of lower quality.
2) Electronic panel increases parts cost, assembly costs (as more skilled labor needed), and
service and support costs since their failure rate is likely to be higher.
3) Part reduction will reduce blade assembly costs by decreasing parts cost, reduce
assembly labor, less heat light and fuel from less machine time required for the product,
reduced procurement cost as fewer parts are ordered, fewer vendors to deal with and
check on, less quality costs as fewer parts mean fewer part failures, less service and
support costs since fewer chances of part failure.
4) Cycle reduction may not provide significant cost savings since it only simplifies the
clock timer functions. A less expensive clock timer is probably needed. However, as long
as other cycles are there, cost savings may be minimal.
5) A standard power supply that is being used in other products allows a company to
reduce purchase costs by pooling all purchases and getting quantity discounts from
suppliers. The latter in turn can reduce cost by taking advantages of economy of scale.
6) A ten year power supply will probably reduce cost as a less expensive power supply can
be used. Since dishwashers are unlikely to last more than 10 years, this is a good way to
reduce costs.

8. A value index is the ratio of importance to cost. That is:

VI = % importance  cost % or % cost x VI = % importance
For the three components the percents are:
Cost % Importance % Value Index
Ink 27/50 or 54% 42.12% .78
Color 18/50 or 36% 52.88% 1.4689
Paper 5/50 or 10% 5% .5

The value index tells us that a value of greater than one is where we should enhance a product.
Using the importance ranking we can verify that color sensor is the area we should enhance. As
shown below, the customer price of $49 can be decomposed into the three features as follows:
Importance Price Cost
Target Costing, Version 1.1—page 2 of 3
 Ink 42.12% $20.64 $27
Color 52.88% 25.91 18
Paper 5% 2.45 5
Total

As the above table shows, we should provide color sensor since it costs $18 and a customer is
willing to pay $ 25.91 for it.

Target Costing, Version 1.1—page 3 of 3