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A printing company makes ink cartridges. Its cartridges are known for being durable and long lasting. One cartridge required 1 casing, 1 printhead, 0.5 grams of ink, few hours of skilled labor and few hours of machine time. Selling price from the market has been determined at $110. It wishes to achieve a margin of 25%. It’s using target costing and has calculated a cost gap.
The question is: how can it reduce the cost gap? Choose two options.A: Accept a lower margin on the product
B: Increase the selling price
C: Use fewer grams of ink in the cartridge
D: Get bulk discounts from supplier of casingsI was thinking A and D as reducing the ink in the cartridges would have an impact on the longevity of the cartridge – which it is known for, but another possible combination could be C and D.
My main question is can we accept a lower profit margin in such situations to reduce the target cost gap.
One way to reduce the cost gap in target costing is to accept a lower margin on the product. This means that the company would be willing to make less profit per unit in order to reduce the cost gap and make the product more affordable.
Another option to reduce the cost gap is to get bulk discounts from the supplier of casings. By purchasing casings in larger quantities, the company can negotiate lower prices and reduce the overall cost of production. This can help bridge the gap between the target cost and the estimated cost of the product.
It is important to note that reducing the grams of ink in the cartridge may not be a viable option as it could impact the longevity and quality of the cartridge, which is one of its key selling points. Therefore, option C may not be the best choice in this scenario.
Accepting a lower margin on the product and obtaining bulk discounts from the supplier of casings.
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