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Target costing - Case Study Example

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Target Costing Answer 1 Innumerable modifications were faced by Mercedes in 1990 facing stiff competition from the Lexus. The company also underwent a lot of cultural changes which took place in the top management of the company. The company has never been in this situation of losing money before…
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Target costing

Thus the cost has never been a primary consideration for the company. But the changes which aroused the competitive environment of the company were cost competition and product innovation with its competitors. The invention of the new segment related to the sports utility vehicle and other market niches are the other factors of the competitive environment for Mercedes. Answer 2 The main changes that took place in the worldwide luxury automobiles were the introduction of the new products in the market which led to the rise in the competition of the company; partnering with the suppliers; reduction in the complexity of the system; new emphasis was being placed on the cost control of respective companies whereas Mercedes cost control was being led by engineers rather than accountants; the number of managerial level were being reduced which was still high with Mercedes; the concept of lead time were being introduced to tackle the costing of companies in an organised way but Mercedes lacked accountants specifically assigned to look after the costing of the company. Answer 3 The factors based on which MB competes with the other automobile producers are pricing of the product ranging from mid to upper zone, quality and functionality of the product maintained at a very high level. The pricing of the product afore mentioned ranged as its target customer rangers from the higher middle class to the bourgeois of the society. Through this they are able to distinguish themselves as a luxury car which is also affordable by a section of the middle class of the society. This helps in expanding the customer base of the company. However, the quality and the functionality of the company are kept high for maintaining the world-class standard. Moreover, Mercedes does not produce the most expensive sports utility car unlike Land Rover. Furthermore, Mercedes does not strictly follow target costing as the cost control measure of the company so as to produce the lowest priced product in its class (Cooper 163). Answer 4 The product line expansion has occurred though its new expansion as the traditionally luxury-oriented manufacturer. The latest add-ons to the company are A-class, C-class, SLK, E-class and M-class. The recent introduction of the company includes off-road vehicles and new sports car. The C-class which is a mid-sized vehicle also referred to as the baby-Benz. The target costing of a company mainly comprises of three components namely, target cost which is obtained by subtracting target profit from the target selling price of the product of the company. So as to diminish the cost of the company it should focus on the customer group and comparable products both potential as well as existing. However the profit margin of the company depends on the critical volume of the company which is the production volume. Since Mercedes is an automobile manufacturing company, it is dependent on capital intensive structure which in turn is based on the NPV model. Furthermore the NPV of the company is determined from the long-run profitability, cost of capital, sales volume by class and profitability across vehicle classes. Answer 5 The development of the index comprises of five steps namely, categorically ranking the consumer importance, target cost percentage by function group, categorising of the function group matrix, importance matrix and the target cost matrix. Development of the ... Read More
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