Chapter 8

Evaluating Your Costs

image In-a-Rush Tip
Do not skip this critical chapter or the Cost Analysis Worksheet for it. (See the Appendix and also visit the companion web site to download/print out the worksheet.) However, if your costs do not change with the quantity you sell, you can skip the part of the worksheet that deals with quantity/cost changes.

The Ideas Behind “Target Costing” and “Target Engineering”

The traditional cost-plus calculation gives way to a more market-oriented, price-minus calculation. The amount customers are willing to pay for a product that fulfills their requirements is determined first. Based on this information, the highest acceptable price is calculated, and the target margin is deducted from that price. The result is the maximum cost allowable for this product. The traditional idea of “How much will the product cost?” is replaced with “How much can the product cost?”

Butscher and Laker (2000)

JUMP had a new basketball sneaker with several advanced features and a modified cushioning technology. The cost of the sneaker was $40. Adding the target margin of 100 percent resulted in a price to the dealer of $80. Adding the dealer’s margin of 50 percent on top of that led to a market price of $120, which put this sneaker in the upper price range with the most expensive models from Adidas, Nike, and Reebok. Expected sales in this price category were thin. ...

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