The Mountain Braker

An illustration of target costing:

THE MOUNTAIN BRAKER (produced by MRB Ltd)

• MRB intends to introduce a new bike model that can descend steep slopes using a consistent braking pattern that pumps both front and back brakes at regular, pre-set intervals, depending on the brake setting that the biker chooses. Marketing dept surveyed customers who confirmed that they are willing to pay more for this option. Because MRB brands are not well-established, prices for its bikes need to be kept below those of its major competitors.

-     Task 1: Determining target price, quality and functionality

• After conducting customer surveys and focus groups, the marketing staff identified five features (functions) that are highly important to prospective customers : weight of the bike, robust riding for long periods of time, appearance, ease of handling, riding comfort even on rough terrain.
• Competing models with these features range from RM800 to RM1200. The model with the highest market share in that price range is priced at RM949.  MRB believes that the mountain braker should be priced at RM950 to achieve a 25% market share.

• Task 2: Determine target cost

Target price                  RM 950

Less profit margin (10%)      95

Target cost                           855

• Task 3: Designing product and production process to achieve target cost

A team to handle product and production process design is formed consisting of one person from these areas – marketing, engineering, purchasing, accounting, administration.

The engineering rep prepares costs for the new model incorporating the new braking system and arrived at total cost of RM905, as follows:

ASSUMING SALES OF 50,000 BIKES

Product design changes

The team decides to use value chain analysis to seek opportunities for cost reduction. The engineering rep analyses current design, searching for steps in the manufacturing process and components that can be eliminated. The accountant provides cost information for prospective changes. The marketing rep provides information about customer reaction to proposed changes.

• Reflectors on the spokes can be eliminated because the bike will be mostly used on rough terrain, and occasionally only on the streets. If used on the roads can use battery operated headlamp and tail lights. RM15 of reflector and its mounting cost can be eliminated.
• Bike seats When engineering rep suggest cheaper bike seat that is easier to mount, the marketing rep organizes a focus group with prospective customers to determine the effect on sales. Feedback from the focus group indicates that the price would have to be reduced if a lower-quality seat is installed, so this idea is dropped.

          Supplier negotiations

          The team negotiated with new suppliers for cost reductions in direct materials:

• handlebars new type with comparable quality can be reduced by RM10 per bike
• tires from existing company can reduce by RM5 per bike for bulk purchase
• tire tubes can be supplied by a new vendor and with RM5 reduction per bike

      [ combined, manufacturing cost can be reduced by 15+10+5+5=RM35 per bike ]

         Non-manufacturing costs

          The target costing team meets with the marketing dept and director of finance to identify reductions in selling & distribution, warranty & support and administration costs.

Selling & distribution

Marketing wants no reduction in advertising (campaign on the new brake system) or sales rep commissions (highlighting the new feature to customers). However, the shipping company agreed to reduce shipping costs by RM5 per bike because it is cheaper the ship large lots.

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