Exercise 8-1 Mesa Cheese Company has developed a new cheese slicer called Slim S

Question

Exercise 8-1 Mesa Cheese Company has developed a new cheese slicer called Slim Slicer. The company plans to sell this slicer through its catalog, which it issues monthly. Given market research, Mesa believes that it can charge $20 for the Slim Slicer. Prototypes of the Slim Slicer, however, are costing $22. By using cheaper materials and gaining efficiencies in mass production, Mesa believes it can reduce Slim Slicer's cost substantially. Mesa wishes to earn a return of 40% of the selling price.

(a) Compute the target cost for the Slim Slicer.

(b)- When is target costing particularly helpful in deciding whether to produce a given product?

Explanation / Answer

mesa wants to charge $20 for each product

they wanted a return of 40%

so the target cost should be $20-40%($20) = $12

TARGET COSTING

Target costing is an approach to determine a product’s life-cycle cost which should be sufficient to develop specified functionality and quality, while ensuring its desired profit.

It involves setting a target cost by subtracting a desired profit margin from a competitive market price.

A target cost is the maximum amount of cost that can be incurred on a product, however, the firm can still earn the required profit margin from that product at a particular selling price. Target costing decomposes the target cost from product level to component level. Through this decomposition, target costing spread the competitive pressure faced by the company to product’s designers and suppliers.

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