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Target Costing Case Study

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04. What is target costing?
Definition: "Target costing is the system to support the cost reduction process in the developing and designing phase of an entirely new model, a full model change or minor model change" (Monden, 1991)
4.1 Impact of target costing to customers
4.1.1 The customer sophistication determines how good customers are at detecting differences between the quality, price and functionality of competitive products. Sophisticated customers are highly educated about the product offerings and can detect minor differences, and will freely switch between manufacturers to buy the products that best satisfy their needs.
For example in Toyota, the primary characteristic of the survival is differentiating the products as functional.
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For example, the market is sampled when the product is first conceptualized, just before it enters the product design stage, and just before it enters the production stage. The primary purpose of these market revisits is to capture how the position of survival zones has changed since the last survey. The product’s design is then modified where possible to increase its probability of success.

4.1.3 The degree to which customers understand their future product requirements
 As the degree of understanding increases, it's become more beneficial to relied customer preferences to determine the future location of survival zone. When customers have little understanding Toyota has had paid too much attention to customer risk launching products that fail because they are outside their survival zones. For example, Toyota's customers can be relied upon to tell the firm what need to be improved in their designs and to a certain extent by how much. In such an environment, target costing will offer considerable benefits because the customer is able to specify quite accurately the location of future survival zones. (Cooper,
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Major variations are achieved via the introduction of different product model (Toyota Corolla Versus Camry)

4.2.2 Frequency of Redesign
Rapid introduction of new products with each new generation incorporating the latest technology and hence providing increased functionality. In all of the firms, product development times have been reduced to enable more frequent product introduction to occur. Thus, intense competition has forced the firm to become an expert at developing and launching products at a rapid rate. However, this ability has a downside.
a. The duration of the manufacturing phase is short, therefore the time available to generate an adequate return on the up-front investment is limited and it leads to lower sales volumes of each product. To remain profitable, the firm must launch a high percentage of profitable as opposed to unprofitable products.
b. Due to the short product life cycles, there is inadequate time to correct any errors. If an unprofitable product is launched, it will often remain unprofitable until it is withdrawn. Therefore, it becomes critical to design new products so that they are profitable.

4.2.3 Degree of
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