Mercedes Benz All Activity Vehicle

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10-4. Mercedes-Benz All Activity Vehicle (AAV)
The target costing case literature contains numerous examples of Japanese cost management practices; however, few cases describe the use of target costing by large companies outside Japan. The purpose of the Mercedes-Benz AAV case is to consider the competitive environment of a leading German automotive manufacturer and the company 's response to changing competitive conditions. The teaching plan generally follows the suggested student assignment questions. In places, I recommend considering additional material during the case discussion. These questions are identified by a check mark.

Student Assignment Questions
1. What is the competitive environment faced by MB?
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This question provides a link to finance classes. Most students have studied the concepts of weighted-average cost of capital. I recommend spending a few minutes reviewing these concepts and linking cost of capital to net present value (NPV) analysis. Because of the capital-intensive structure of automobile manufacturing, production volume is a critical factor in determining each model 's NPV. Students may identify the following points for determining a required margin. long-run profitability; cost of capital; profitability across the entire product mix (classes of vehicles); sales volume by class.
The MB case suggests the target cost is "alive." Is this consistent with the ideals of target costing?
I generally emphasize that Mercedes did not consider the target cost to be locked in. It was a moving target. As engineering changes became necessary, the target cost was allowed to move. However, before making a change, market forces were considered. For example, changes included the addition of side airbags. In addition, the European press was critical of a simulated wood-grain part. Management decided the part would remain plastic because costs could not be passed on to the consumer. The main point to emphasize is the design of the vehicle is dynamic; thus costs must evolve to reflect the changing design characteristics.

5. Explain the process
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