How does target costing address price reductions in competitive markets?

How does target costing address price reductions in competitive markets?

• A. By cutting all marketing expenses.
• B. By increasing the selling price above market levels.
• C. By designing products to meet target costs that align with the desired selling price and required margin.
• D. By ignoring cost structure and focusing on speed to market.

Answer: (C)

Target costing starts from the market price customers are willing to pay and the profit you want, then works backward to what the product must cost. By calculating a target cost that fits the desired selling price and required margin, design and production teams collaborate to meet that cost through smarter material choices, simpler design, supplier collaboration, and production process improvements. This ensures the product can compete on price while still delivering the planned profitability. Other approaches don’t fit because simply cutting marketing spend doesn’t guarantee a viable product at the market price, raising the selling price ignores market constraints, and ignoring the cost structure in favor of speed to market risks profitability by omitting cost realities from the outset.

Target costing starts from the market price customers are willing to pay and the profit you want, then works backward to what the product must cost. By calculating a target cost that fits the desired selling price and required margin, design and production teams collaborate to meet that cost through smarter material choices, simpler design, supplier collaboration, and production process improvements. This ensures the product can compete on price while still delivering the planned profitability.

Other approaches don’t fit because simply cutting marketing spend doesn’t guarantee a viable product at the market price, raising the selling price ignores market constraints, and ignoring the cost structure in favor of speed to market risks profitability by omitting cost realities from the outset.