Posted: April 10th, 2016

What is target costing?

The T&M company wants to expand internationally. The marketing department suggests starting with specialty stores in Italy since a survey indicates that American quality towels are appreciated in Italy. The current price is about 20% higher than comparable towels marketed in that country.

The marketing manager says that the company needs to learn from its international competitors and apply target costing in order to satisfy the customer and provide growth for the company.

Assume that you are in charge of this new international expansion. The goal is to sell the same number of towels to specialty stores in Italy as in the U.S. during the first year. The price must be reduced by 20%, but the company wants the same profit for this division as the U.S. specialty store division.


What is target costing? Discuss the concept and how it is relevant in today’s business environment.

Explain how to reduce the selling price, but make the same profit on the Italian sales. How do you change the manner in which the towels are sold and/or distributed? You need three concrete suggestions. Explain them in detail, and support your suggestions with an income statement for the Italian Specialty Store Division. The income statement must show revenues at a lower price, relevant expenses, and the same profit as the domestic specialty store division.

You may not be an expert in producing and distributing towels and your numbers may not be representative of the industry, but you need to describe and justify your approach. For example, break down the numbers in the income statement and show more detail, so you have information to work with. Again, provide detail, explain, and justify your ideas supported by accounting information.

What are the obstacles, if any, in executing your idea(s)?

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