Toyota Motor Corporation uses target costing. Assume that Toyota marketing perso

Question

Toyota Motor Corporation uses target costing. Assume that Toyota marketing personnel estimate that the competitive, average selling price for the Rav4 in the upcoming model year will need to be $24,000. Assume further that the Rav4's total unit cost for the upcoming model year is estimated to be $20,500 and that Toyota requires a 20% profit margin on selling price (which is equivalent to a 25% markup on total cost).

What price will Toyota establish for the Rav4 for the upcoming model year? The answer is NOT $25,625.

Explanation / Answer

As per target costing, the final price and cost is determined after market analysis. The product is designed to meet the target costs. If the target costs are not met, the product will be redesigned.

In this case, the target price already has been established as $24,000. The product will have to be redesigned to change the unit cost to achieve the profit margin.

Unit cost = Target price - profit margin

= 24,000 - 20% of 24,000 = $19,200. This will be the target cost. Target price will be $24,000.

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