Essay on Nissan Motor Company

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Nissan Motor Company – Target Costing System – Extra Question

1 – What is the purpose of Nissan’s target costing system?
Nissan deployed target costing system to achieve following benefits
Systematic approach: The purpose of the target costing system is to have a systematic procedure to manage costs for new product introductions in order to allow them to earn the necessary profit margin to meet corporate profitability objectives.
Customer Orientation: Target costing promotes customer focused rather than company focused approach. In order to use target costing method, Nissan needs to understand its target market and can select product features to better suit the target audience. By setting a price which customer will pay, Nissan
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Life cycle view: Target costing involves profit analysis over the lifecycle of the product. This ensures development of new model will only get approval if the profits generated throughout the life cycle outweigh the cost involved. Since most of the cost decisions are made during design stage, understanding the profitability throughout the product life cycle is critical to launch a profitable model.
Partnership with suppliers: By involving suppliers in cost reduction activities, Nissan fosters relationship with suppliers and benefit from their expertise.
2 – What approach could be used other than target costing?
Two other approaches used to price products are cost-plus pricing and value pricing.
Under cost-plus pricing the company uses cost as a starting point to determine the price, rather than price to determine the allowable cost as under target costing. The firm adds a markup to its cost base to provide for non-assigned costs and the desired profit margin. Different cost-bases can be used – e.g. variable manufacturing cost, all manufacturing costs or the full cost of the product (including costs of other business function than manufacturing). The markup percentage depends on the cost base used and the desired profit margin, but external factors like competition and demand also have to be taken into account. Downside of using cost plus is that it ignores the concept of price elasticity. Without knowing customer response towards a

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