Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 9

Target Costing; International Harpers, Ltd., is a U.K. manufacturer of casual shoes for men and women. It has sustained strong growth in the U.K. market in recent years due to its close attention to fashion trends. Harpers’ shoes also have a good reputation for quality and comfort. To expand the business, Harpers is considering introducing its shoes to the U.S. market, where comparable shoes sell for an average of $90 wholesale, more than $16 above what Harpers charges in the United Kingdom (average price, £ 45). Management has engaged a marketing consultant to obtain information about what features U.S. consumers seek in shoes if they desire different features. Harpers also has obtained information on the approximate cost of adding these features:

Features Desired in the United States	Cost to Add (in U.S. $)	Importance Rating (5 is most important)
Colorfast material	$4.50	3
Lighter weight	6.75	5
Extra-soft insole	3.00	4
Longer-wearing sole	3.00	2

The current average manufacturing cost of Harpers’ shoes is £34 (approximately $56 U.S.), which provides an average profit of £11 ($18 U.S.) per pair sold. Harpers would like to maintain this profit margin; however, the firm recognizes that the U.S. market requires different features and that shipping and advertising costs would increase approximately $10 U.S. per pair of shoes.

Required

1. What is the target manufacturing cost for shoes to be sold in the United States?

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2. Which features, if any, should Harpers add for shoes to be sold in the United States?

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3. Strategically evaluate Harpers’ decision to begin selling shoes in the United States.

Step 1 of 3

1.?Target manufacturing cost = Current manufacturing cost + “U.S. Differential”

= $56 + Price differential - Cost differential

= $56 + $16 - $10 = $62

Or:

?Target cost = target price – differential advertising and shipping – desired US profit

??$62 = $90 - $10 - $18