What are some examples of target costing in business?

What are some examples of target costing in business?

Target costing is a pricing strategy where a company determines the desired profit margin and then works backward to achieve that cost. For example, a smartphone manufacturer might set a target cost of $300 to ensure a profit margin of 20% on a $375 retail price.

Can you give me another example?

Sure! A car manufacturer might decide that a new model should retail for $25,000. If they want a profit margin of 15%, they would set a target cost of $21,250 and then design the car to meet that cost.

How does target costing help businesses?

Target costing helps businesses by ensuring that products are designed and produced within a cost structure that allows for profitability. It encourages efficiency and innovation in product development.

What industries commonly use target costing?

Industries like automotive, electronics, and consumer goods commonly use target costing due to their competitive nature and the need for cost control.