A major advantage of the target costing approach to pricing is that target costing
A)allows a company to analyze the potential profit of a product before spending money to produce the product.
B)is not dependent on customers' quality-versus-price decisions.
C)identifies unproductive assets.
D)anticipates the product's profitability midway through its life cycle.

Question

Quizplus · Accepted Answer

Target costing helps a company to estimate the potential profit of a product before investing money in producing it. This enables the company to evaluate the feasibility of the product, and the price can be adjusted accordingly. This approach helps in managing costs and achieving the desired profit margins by targeting cost reductions in the design and development phase itself. Hence, option A is the correct choice. Option B is incorrect because target costing is customer-focused, and the price is determined based on customer value perception. Option C is incorrect because target costing does not specifically identify unproductive assets. Option D is incorrect because target costing is predominantly used in the early stages of product development to determine the target cost and price, before the product is launched in the market.

A Major Advantage of the Target Costing Approach to Pricing