Target costing is a cost management tool used by Roller System, a manufacturer of inline skates and components, to reduce product costs over the lifecycle. The company currently produces one skate model but is developing a new "City" model for urban transportation. It defined the target costs for the new City model based on marketing's suggested sale price and margin goals. Two component combinations were analyzed to meet the target costs for a production run of 200,000 units. Combination 1 had the lowest total cost and highest profit margin of 16.98%.

1. Target Costing and new Product
Development at Roller System

2. Introduction
Roller system is an SME specialized in the manufacturing of
components and inline skates. Manufactures components for
distributors, competitors and for the assembly of its own skate
model.
Product
City model is intended for urban use, the removable frame goes
with flexible boot ,allow for easy walking. Its constitutes an
alternative mean of transport.

3. Definition
Target costing : It is a pricing method used by firms. It is defined
as "a cost management tool for reducing the overall cost of a
product over its entire life-cycle with the help of production,
engineering, research and design".

4.  In the given case the present scenario is shown as follows
:
 Sales price 130x 100,000 = 13000000
 Production capacity = 100000
 Margin = 20 x 100000 =2000000
 Cost = 110x100000 =11000000

5.  Indirect Manufacturing cost +
1000000
 Fixed cost
+1000000
 Cost of components
+7500000
 Total costs =
1,10,00,000
Margin +
20,00,000
 Direct Manufacturing costs
1500000

6.  The marketing departments suggestions for 1,00,000 unit
,selling price =119, cost price =109,margin (M)=10.
 Direct manufacturing cost
15,00,000
 Indirect manufacturing cost
+10,00,000
 Fixed cost
+10,00,000
 Cost of components
+74,00,000
 Total cost =
1,09,00,000
 Adding up the margin cost
+1000000

7.  When we want to produce 200000 units with the selling
price = 120.
 Direct manufacturing cost
17,25,000
 Indirect manufacturing cost
+12,00,000
 Fixed cost
+10,00,000
 The cost of component is divided into 2 combinations

8. Combination 1 :
Basic shoe(20x2,00,000+2,50,000 )
42,50,000
P.V. Frame(20x2,00,000+600000)
+46,00,000
Wheel D-25.1(18x200000+100000)
+37,00,000
ABEC5 bearing(6x200000+200,000)
+14,00,000
Detachable brace(200000x10+50000)
+2,05,00,000
Total cost =
1,99,25,000
the margin cost +

9. Tour Shoe(25x200000+250000)
52,50000
Metal frame(25x200000+600000)
+56,00,000
Wheel-D25(18x200000+100000)
+37,00,000
ABEC-5 bearing(6x200000+200000)
+14,00,000
Detachable brace(200000x10+50000)
+20,50,000
Total cost =
2,19,25,000
Margin
Combination 2

10. PROFIT ANALYSIS IN %
=(PROFIT/SALES)*100
Present scenario = (2000000/13000000)*100
=15.38%
Marketing department = (1000000/11900000)*100
= 8.40%
Combination 1 = (4075000/24000000)*100
= 16.98%
Combination 2 = (2075000/24000000)*100
= 8.65%
Present scenario with marketing department
= (13000000-
11900000)/13000000*100
= 8.46%
Present scenario with combination 1 and combination 2
= (13000000-
24000000)/24000000*100

11. THANK YOU