Toyota Motor Corporation (TM) uses target costing. Assume that Toyota marketing personnel estimate that the competitive, average selling price for the Rav4 in the upcoming model year will need to be $26,000. Assume further that the Rav4’s total unit cost for the upcoming model year is estimated to be $22,000 and that Toyota requires a 20% profit margin on selling price (which is equivalent to a 25% markup on total cost).

a. What price will Toyota establish for the Rav4 for the upcoming model year?

b. What impact will target costing have on Toyota, given the assumed information?