Unformatted text preview: ricing approach.
Target costing and new product development:
Exhibit 5-13, p. 219 shows a real company’s target
costing process for a new product. The new
product has three parts, requires direct labor, and
four types of indirect costs. See the Exhibit.
four Dr. Hussein Khasharmeh
Dr. Hussein Khasharmeh Illustration of target costing:
Consider the target costing system used by ITT
automotive – one of the world’s target automotive
suppliers. What pricing system the Co. use for its
The company forms a target – costing group and charges
it with determining whether the price and costs allow
for enough of a profit margin. Factors the group
considers in determining the feasibility of earning the
desired target profit margin include competitor pricing,
inflation rates, and potential cost reductions during
both the design and production stages of the product
life. Dr. Hussein Khasharmeh
Dr. Hussein Khasharmeh Suppose that ITT receives an invitation from Ford (the
customer) to bid on its product. Assume the following data:
- The specifications contained in Ford’s invitation lead to an
estimated current manufacturing cost (component parts,
direct labor, Manufacturing overhead) of $154.
- ITT had a desired gross margin rates of 30% on sales,
which means that actual cost should make up 70% of the
- Highly competitive market conditions exist and have
established a sales price of $200/unit.
If ITT had used cost – plus pricing to bid on the product, the
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- Spring '13
- Pricing, Dr. Hussein Khasharmeh