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(b) How has MB reacted to the changing world market for luxury automobiles?
from traditional strategies at Mercedes:
• many new product introductions;
• partnering with suppliers;
• quality—at upper range of zone;
• functionality—at upper range of zone.
An interesting point to discuss is that Mercedes does not produce the most
expensive sports utility vehicle. This distinction is reserved for the Land
priced product in its class.
2 Robin Cooper, When Lean Enterprises Collide, Boston: Harvard Business School Press, 1995.
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coverage?
The new introductions expand the product line of the traditionally luxury–
oriented manufacturer. Recent product introductions include the following:
• A Class;
Let’s discuss the elements of the target costing model and how these
elements are developed.
At this point in the discussion I usually write the target costing formula on
the board and ask students to consider sources of various inputs:
• customer focus groups;
Stress the broad, cross-functional aspects of acquiring consumer
What factors are considered when developing the required target profit
margin?
This question provides a link to finance classes. Most students have
studied the concepts of weighted-average cost of capital. I recommend
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intensive structure of automobile manufacturing, production volume is a
critical factor in determining each model’s NPV. Students may identify the
following points for determining a required target profit margin.
The MB case suggests the target cost is “alive.” Is this consistent with the
ideals of target costing?
I generally emphasize that Mercedes did not consider the target cost to be
point to emphasize is the design of the vehicle is dynamic, thus costs must
evolve to reflect the changing design characteristics.
(e) Explain the process of developing an importance index for a function group
or component. How can such an index guide managers in making cost
reduction decisions?
• consumer importance category rankings;
• target cost and percentage by function group;
Table 1. From conversations with potential consumer groups, a list of key
categories was developed. Next, potential customers were asked to rate the
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important than economy and styling.
Table 3 is best understood by reading each category as a column. The rows
explain the relative importance of each function group to satisfying each
(less important) consumer categories.
Table 5 results in a target cost index for each function group that attempts to
capture cost and benefit trade-offs. As discussed in the case, this index may
At this point, ask students to identify various value-engineering strategies. At
Mercedes, reducing the cost of each function group was accomplished by
From the conceptual phase through the production phase, the suppliers of
systems for the AAV truly were partners. Suppliers attended regular meetings
with the cost planners throughout the entire process. Thus, suppliers were:
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the AAV?
Suppliers provide entire systems for the AAV.
The facility uses a JIT production system. In fact, many suppliers deliver
directly to the assembly line, rather than to a small warehouse.
accidents on a major bridge.
(h) What role does the accounting department play in the target costing process?
Stress the fact that accountants were watchdogs in the target costing process.
Their primary responsibility was to ensure costs did not exceed targets during
• cost control;
What are some of the organizational barriers that may challenge
managers attempting to introduce target costing systems?
• suppliers treated as adversaries;
• government regulations affecting exchange of information.