Cost Gap

Hi, Thanks for your question(s)- Its great to see you working over the holidays – the extra toil will certainly pay off.

In terms of target costing – simplifying the design to require less components is a common solution to reduce an actual cost with the aim of meeting target cost.

This is because a key idea within target costing is that you manage the costs at the product’s design stage. So you remove non-value adding items from the product and eliminate any unnecessary complexities in its production by simplifying or removing parts /functions that the customers don’t actually place value upon.

For example – the process of adding heated seats into a car will have a cost. Assuming you have market research to suggest that your target customers do not highly value this extra feature then removing this option from the basic model does not affect the value of the car as perceived by most customers.
This will reduce the total cost of manufacture. Those customers who do wish to have heated seats installed can pay extra for that.

Simplification of a product components will reduce production time and decrease material costs yet if done correctly through ‘value analysis’ -the customers will not perceive the value of the final product to be any less.

Hope this explains ok

You are doing well – the type of queries you are posting show me you have a good level of understanding already.
Good luck with the revision – I’m glad you are using the Open Tuition resources.
Kindest Regards
Cath