Toyota Motor Corporation (TM) uses target costing. Assume that Toyota marketing

Question

Toyota Motor Corporation (TM) uses target costing. Assume that Toyota marketing personnel estimate that the competitive, average selling price for the Rav4 in the upcoming model year will need to be $28,400. Assume further that the Rav4’s total unit cost for the upcoming model year is estimated to be $23,300 and that Toyota requires a 20% profit margin on selling price (which is equivalent to a 25% markup on total cost).

a. What price will Toyota establish for the Rav4 for the upcoming model year?
$

b. What impact will target costing have on Toyota, given the assumed information?

Toyota will be able to add a 25% percent markup on its product cost and still remain competitive.

Toyota will have to remove $580 from its total costs in order to maintain competitive pricing within its profit objectives.

Toyota can increase its total costs by $580 and still maintain competitive pricing.

Toyota will no longer be able to produce the Rav4 model since it cannot sell it at a profit

Explanation / Answer

Rav4’s total unit cost for the upcoming model year is estimated to be      $23,300.

Profit of toyota = 0.20 * 28400 = $5,680

a) Selling Price for Totyota   = $28,980

MArket competetive price    = $28,400

Increased Price = 28980-28400 = $580

b) Toyota will have to remove $580 from its total costs in order to maintain competitive pricing within its profit objectives.

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