Case Study Question :

Great Makers Pte Ltd (GM) is currently finalising its a latest toy based on a cartoon franchise. This is to meet demands of the franchises strong fan base. The Board of Directors had been pressing for an earlier release of this product. The production manager had done some costing and provided the following:

Colouring $8.00

Moulding $12.00

Stickers $6.00

Box $7.50

Wiring $6.00

The production department is still identifying the suppliers who will be providing the raw materials. Management expects the costs not to escalate. Based on the latest market study, the average selling price of such a product is typically of $50.00. Management further stated that the profit margin should be 25% and no less for each unit of the toy sold.

Required:

(a) Discuss the three key reasons for the use of target costing in the scenario provided in the question.

(b) Discuss the reasons for businesses preferring to rely on the cost-plus costing method, rather than target costing.

(c) Using the information provided in the question, calculate the expected cost gap. Show all calculations.

(d) Identify and describe three areas in the value chain where cost savings can be achieved. You should relate your answer to the information in the scenario provided.

(e) Explain why management chose market-based pricing over-penetration pricing.