Printworx Case Study

Target costing is a pro-active cost control system. There is no cost slashing rather there is continuous pressure to keep the costs of a product to a minimum. Target costing sets the selling price of the product by analysing the external environment, its competitors, customer reviews, requirements and their willingness to pay. The target profit is then determined from the predetermined selling price and this results in the target cost. The target costs is then compared to the expected unit costs to ensure that the target cost is being met and if not what needs to be adjusted to get to the required target cost. The target cost is reduced for the remainder of the products life (continual cost reduction) and is revised perhaps monthly. Functional …show more content…
The aim is to produce a target cost which is less than the target selling price. The target selling price of the new items should be fairly easy to determine by observing what customers require, what competitors are producing, competitors prices for such products and the prices customers are willing to pay for such products. The selling price is also affected by the sale volume. The higher the sales volume, the lower the selling price can be, resulting in a lower target cost. The selling price will be easy to determine wince they are looking to get into a market that is already established, observing competitor prices in the market will assist in determining the selling price. The profit requirement will be determined by the fact that Printworx expects to be successful through its existing business contacts, if it controls its costs. Once the selling price and profit margin is set the target cost can be determined. The total target cost should be split between the various departments involved in the product and ensure that each department stays within its target cost. Cost savings begin from the beginning of the process in target costing and need to continue into the production the budgeting process continuously till the end of the …show more content…
The lifespan of the machine is likely to be five years which is a short period. Either Printworx can set a high initial price which will result in high initial cash flows based on its expected success from its existing contacts. This will allow a substantial profit to be made initially while they still have their exiting contacts loyalty. As time goes they may lose some of these contact due to competitors pricing being lower. Printworx can thus over time reduce its selling price to maintain its customer base and overall the profit made from the start till the end would allow them to easily recover the costs of the machine invested