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Target Costing

ACCA · Question 18 · Target Costing

Section B - Case 1: AeroYield

AeroYield is a technology startup developing specialized drones for the agriculture sector to monitor crop health. The company is preparing to launch its new model, the 'AgriScout'. Market research indicates that customers are willing to pay $8,000 for the AgriScout. AeroYield's investors require a profit margin of 25% on the selling price.

The current estimated production cost for the AgriScout is $6,400 per unit.

Which TWO of the following methods would be appropriate for AeroYield to close the target cost gap?

Answer options:

A.

Increase the selling price of the AgriScout to $8,533.

B.

Use value engineering to redesign the drone's casing using lighter, cheaper materials that do not affect performance.

C.

Negotiate bulk discounts with the suppliers of the drone's camera sensors.

D.

Reduce the required profit margin to 20%.

How to approach this question

Look for options that reduce the *cost* of production without reducing the *value* to the customer, while keeping the selling price and profit margin fixed.

Full Answer

To close a target cost gap, a company must reduce its estimated costs. This is typically done through value engineering (redesigning the product to remove non-value-adding features or use cheaper materials) and improving supply chain efficiency (e.g., negotiating better prices). Changing the selling price or required margin violates the principles of target costing.

Common mistakes

Selecting option A. While mathematically it works to maintain the margin, target costing assumes the selling price is dictated by the market and cannot be changed.
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