Our Lakewood facility would benefit from an additional unit (NPV=$10,000). We co

Question

Our Lakewood facility would benefit from an additional unit (NPV=$10,000). We could buy the new unit for $6,000 or relocate a unit from another facility for $5,000. You decide to relocate a unit. While it is in transit an accident results in the destruction of the unit. There was no insurance on the unit or the transit. The accountant tells you that if you now buy the additional unity, then $11,000 will all be allocated to the project causing it to show a loss. What do you do? Shrink the decision rights of the person who did not buy insurance. Do the best you can without the additional unit. Buy the additional unit. What would you do and why?

Describe why Target Costing can be an valuable approach to pricing, a new to your company, but not the industry, product.  

Pick one or 2 steps of the 7 steps in the decision-making process and describe what you have learned that will make you a more conscious decision maker.

Explanation / Answer

Target costing is the methodology used to estimate the lifecycle cost of a product and based on the profit margin, setting its target cost. When a company wants to launch a new product, target costing can be advantageous as it facilitates the company to manufacture the product at the lowest cost. Cost minimization helps in increasing the profit margin of the company.

The various steps of decision-making process are:

From my experience in decision-making, I feel the following 2 steps are the most critical:

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