2.2 Deriving a target cost

　　Steps

　　1 Estimate a selling price for a new product that will enable a firm to capture a required share of the market.

　　2 Reduce this figure by the firm’s required level of profit. This could take into account the return required on any new investment and on working capital requirements or could involve a target margin on sales.

　　3 Produce a target cost figure for product designers to meet.

　　4 Reduce costs to provide a product that meets that target cost.

　　Illustration 5 Targeting costs

　　Katy Inc, a toy manufacturer, is about to launch a new type of bicycle on which it requires a Return on Investment of 30%.

　　Buildings and equipment needed for production are to cost $5,000,000.

　　Expected sales levels are $40,000 toys pa at a selling price of $67.50 per item costs are currently estimated to be $32 per unit.

　　Required:

　　What is the target cost for annual production?

　　Solution

　　Working$

　　Revenue(67.50×40,000)2,700,00

　　Target costs(balancing figure)(1,200,000)

　　Target return(30%×5,000,000)1,500,000