Question

Describe in your own words how a company could combine an analysis of demand at various price levels and a thorough exercise in target costing in an effort to maximize the profit of a new replacement version of a product it is considering introducing. Assume you have good data about relative demand at various price points, including how much certain product attributes would increase demand at various prices, and have a solid handle on existing fixed costs that would exist and be charged to this product.

Answer 1

Target costing involves incurring a pre determined cost on a particular product to earn a desired profit margin. The company when trying to introduce a new product in to the market must first understand the needs of the customers and price that the customer is willing to pay for the product at various demand levels. The business must also have an understanding of the marketplace, the competitors, the existing products of a similar kind and USP of the product that will be introduced. A detailed of the logistics and other costs involved in the manufacture of the product must be understood by the management. The company must forecast the best possible demand and the worst demand situations in order to break even and stay afloat. Upon considering all the factors listed above, the prices must be set at each level of demand and the cost that the company intends to incur based on the desired profit margin must be ascertained. The company must engage cross functional teams to reduce costs and maximize profitability and must choose the demand level at which the costs are least and the consumer is willing to pay the maximum price.