Cleveland Plastics makes plastic parts for other manufacturing companies. Cleveland has an ABC system for its production, marketing, and customer service functions. The company uses target costing as a strategic decision-making tool. One of Cleveland’s product lines—consumer products—has over 100 individual products with life cycles of less than 3 years. This means that about 30–40 products are discontinued and replaced with new products each year. Cleveland’s top management has established the following tool to be used by the target-cost team for evaluating proposed new products:

The following operational and ABC data are for four proposed new products:

Top management has set a desired contribution to cover unallocated value-chain costs, taxes, and profit of 40% of the estimated market price.

Prepare a schedule that shows for each proposed new product, the target cost, estimated cost using existing technology, and any required cost reduction as a percent of the estimated market price. Use the evaluation tool to make a decision regarding the four proposed new products.

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Required Cost Reduction (RCR) as a Percent of Market Price Action RCR S 0% Release to production 0< RCR < 5% Release to production and set kaizen improvement plan 5% 25% Abandon subject to top management review and approval