Wize University Managerial Accounting Textbook > Pricing
Target Costing
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Target Costing
This pricing technique is useful when a product's selling price is determined by market conditions, such as the level of competition, customer switching costs, and other market factors.
- Determines the cost that must not be exceed in order to earn a desired profit margin.
- Price is typically set by the market, not by the producer.
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Example: Target Costing
ABC Inc. manufactures scientific calculators used primarily by high school students. The company's decision makers believe that the calculator can be sold for $10, and anything above this will drive customers to other products. Management plans to spend $100,000 on a marketing campaign to promote this calculator to high schools in the greater Montreal area, and expects it will lead to sales of 20,000 units. What is the target cost of producing the calculator if the company wishes to earn a 30% return on their marketing investment.
Practice: Target Costing
Wize Manufacturing just invested $100,000,000 into a new manufacturing process that will be used to produce a new smart phone. Given the amount of competition, management believes that the market will not pay more than $400 for their product. If the desired return on investment is 20% and 160,000 units will be produced, what is the target cost of producing one smart phone?