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Unformatted text preview: Chapter 13 - Cost Planning for the Product Life Cycle: Target Costing, Theory of Constraints, and Strategic Pricing CHAPTER 13 COST PLANNING FOR THE PRODUCT LIFE CYCLE: TARGET COSTING, THEORY OF CONSTRAINTS, AND STRATEGIC PRICING QUESTIONS 13-1 A firm has two options for reducing costs to a target cost level: a. Reduce costs to a target cost level by integrating new manufacturing technology, using advanced cost management techniques such as activity-based costing, and seeking higher productivity through improved organization and labor relations. This method of cost reduction is common in specialized equipment manufacturing. b. Reduce cost to a target cost level by redesigning a popular product. This method is the more common of the two, because it recognizes that design decisions account for much of total product life cycle costs (see Exhibit 13-3). By careful attention to design, significant reductions in total cost are possible. This approach to target costing is associated primarily with Japanese manufacturers, especially Toyota, which is credited with developing the method in the mid 1960s. This method of cost reduction is common in consumer electronics. 13-2 The sales life cycle refers to the phase of the products sales in the market - from introduction of the product to decline and withdrawal from the market. In contrast, the cost life cycle refers to the activities and costs incurred in developing a product, designing it, manufacturing it, selling it and servicing it. The phases of the sales life cycle are: Phase One: Product Introduction. In the first phase there is little competition, and sales rise slowly as customers become aware of the new product. Costs are relatively high because of high R&amp;D expenditures and capital costs for setting up production facilities and marketing efforts. Prices are relatively high because of product differentiation and the high costs at this phase. Product variety is limited. Phase Two: Growth. Sales begin to grow rapidly and product variety increases. The product continues to enjoy the benefits of differentiation. There is increasing competition and prices begin to soften. Phase Three: Maturity. Sales continue to increase but at a decreasing rate. There is a reduction in the number of competitors and product variety. Prices soften further, and differentiation is no longer important. Competition is based on cost, given competitive quality and functionality. Phase Four: Decline. Sales begin to decline, as does the number of competitors. Prices stabilize. Emphasis on differentiation returns. Survivors are able to differentiate their product, control costs, and deliver quality and excellent service. Control of costs and an effective distribution network are key to continued survival....
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