ExpertACCA · Question 20 · Specialist cost and management accounting techniques
Section B - Case 1: AeroDrone Tech
AeroDrone Tech is an agricultural technology startup developing the 'AgriScout', a drone designed to monitor crop health. Market research indicates that large-scale farms would be willing to pay $1,200 for such a drone. AeroDrone's investors require a profit margin of 20% on the selling price. The current estimated production cost of the AgriScout is $1,050.
AeroDrone is also considering launching a data-analysis subscription service.
Why is target costing generally more difficult to apply to services than to manufactured goods like the drone?
Section B - Case 1: AeroDrone Tech
AeroDrone Tech is an agricultural technology startup developing the 'AgriScout', a drone designed to monitor crop health. Market research indicates that large-scale farms would be willing to pay $1,200 for such a drone. AeroDrone's investors require a profit margin of 20% on the selling price. The current estimated production cost of the AgriScout is $1,050.
AeroDrone is also considering launching a data-analysis subscription service.
Why is target costing generally more difficult to apply to services than to manufactured goods like the drone?
Answer options:
Services do not have a selling price determined by the market.
Services are intangible and heterogeneous, making it difficult to define a standard unit and strip out specific 'components' to save costs.
Service companies do not require a profit margin.
Labor costs in services are always fixed, so costs cannot be reduced.
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