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Activity based management and Cost management tools

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Let's say you believe after a few years on the market, photon gismos will sell for about \$125.
This allows for the introduction of similar devices by your competitors. Furthermore, let's
say you want to make a profit of \$25 on each gismo sold.

1. What is the target cost for the photon gismo?
2. What is the target profit?
3. What is the target price?
4. Suppose your engineers and cost accountants conclude that your design of photon gismo
will result in a unit cost of \$115. How can yo uuse the concept of target costing to help
5. How could value engineering help in this process? Suggest a few examples.
6. How could two-dimentional activity-based costing help? Suggest a few examples.

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Solution shows calculations of target cost, target profit and target price.

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Activity based mgmt and cost mgmt tools

Let's say you believe after a few years on the market, photon gismos will sell for about \$125.
This allows for the introduction of similar devices by your competitors. Furthermore, let's
say you want to make a profit of \$25 on each gismo sold.

1. What is the target cost for the photon gismo?
Target cost is the estimated long run cost of the product or service that enables the company to achieve its target profit.
Target cost = Target price per unit - target profit per unit =\$125-\$25 =\$100

2.What is the target profit?
Target profit is the expected profit that ...

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