Target Costing Tutorial

🎈Hewlett-Packard designs a laser printer with features that customers have requested and wants to sell it for $240. If they require 40% markup. What is the target cost of the
product?

Cost + profit = selling price

100+40=140

Therefore, if the price is 240 the cost will be 171.43. i.e. ((240/140) *100) and the profit will be ((240/140) *40) = 68.57

🎈 Helen is designing shoes. To maintain the price competitiveness with peer companies she
needs to manage her costs properly. Currently, ladies’ shoes are trading at the market for
3300 LKR and Helen plan of setting the price that is similar to the market ongoing price.
However, she expects to maintain a profit markup of 25%. To maintain the said profit %
what should be her target cost.

Cost + profit = selling price

100+ 25=125

Therefore, if the price is 3300 the cost will be 2640. i.e. ((3300/125) *100) and
the profit will be ((3300/125) *25) = 660

🎈Amelia plans on selling her car for 2 million. If she plans to generate a profit of 0.5
million what is the target cost of the car?

Target cost= selling price – desired profit

 Target cost= 2 million – 0.5 million

Target cost= 1.5 million 

🎈A company is planning a new product. Market research information suggests that the
product should sell 10,000 units at $21.00/unit. The company seeks to make a mark-up of
40% product cost. It is estimated that the lifetime costs of the product will be as follows:

Design and development costs $50,000
Manufacturing costs $10/unit
End of life costs $20,000

The company estimates that if it were to spend an additional £15,000 on design, manufacturing costs/unit could be reduced.

🎉What is the target cost of the product?

Cost + Markup = selling price

100+40=140

Therefore if they plan to sell it at 21, the cost should be 15 ((21/140)*100)
Profit should be 6 ((21/140)*40)

🎉What is the original lifecycle cost per unit and is the product worth making on that basis?

Original life cycle cost per unit = Design + manufacturing cost + End of life /
                                                 Number of units produced

 = (50,000+(10,000*10)+ 20,000) / 10,000

= 17 per unit

But we cannot go ahead with this as it exceeds our target cost of 15.

🎉 If the additional amount were spent on design, what is the maximum manufacturing
cost per unit that could be tolerated if the company is to earn its required mark-up?

Revised life cycle cost per unit = Design + additional design cost+ End of life /
                                                         Number of units produced

= (50,000+ 15,000+20,000)/10,000

=8.5

Max cost we can go for is 15. And some of this cost will be caused by the design and the
end of life costs. Therefore, the maximum manufacturing cost per unit would have to fall
from 10 to (15-8.5=6.5) 6.5. 


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