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Toyota Motor Corporation: Target Costing System
A model change began with a proposal from chief engineers for development of a new model. The proposal usually included: • Specifications such as size (length, width, wheelbase, and interior space), weight, mileage, engine (type, displacement, and maximum power), transmission (gear and moderation ratios), chassis (suspension and brake types), and body components;
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Development budget;
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Development schedule; and
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Retail price and sales targets.
New models basically maintained the same product concept as their predecessors. Styling was not specified at this stage; usually no more than a vague image was mentioned. Most of the cost incurred in any model change was for prototyping.
Retail Prices and Sales Targets
The sales divisions generally proposed the retail prices and sales targets for new models. The retail price remained the same unless a change in function or performance altered the perceived value of the vehicle in the eyes of the customer. In theory, therefore, prices changed as the perceived value of the vehicle changed.
Formula for List Price of a New Model
The selling price of a new car model was composed of the selling price of the equivalent existing model plus any incremental value due to improved functionality. For example, adding air conditioning to the standard version of a model would increase its price by the value of air conditioning as perceived by customers. The incremental value of a new model was determined by analyzing market conditions. Because the automotive industry was mature, most new features already existed in some form on other models. For example, if air conditioning was to be included in the standard version, its added value was determined using the list price of optional air conditioners for other models. In the unlikely event that no equivalent option existed, then the firm's design engineers and market specialists would estimate how much customers were willing to pay for the added feature. The price increase for an added function did not always equal its selling price as a stand- alone option. The incremental price for an increase in functionality might be lowered because of the firm's strategy for the vehicle and because of competitors’ pricing strategies. As functions were added to the standard version, Toyota increased the selling price until it reached the upper limit for that class of vehicle. When this limit was reached, the only potential benefit from adding functionality was increased sales. Because new models were introduced some four years after the design project began, Toyota delayed setting the functionality of the standard version as long as possible. Therefore, the target price and margin for a new model, and thus the associated target unit price , were set quite some time before product launch . The exact functionality of the standard version was set only when factors such as competitive offerings, foreign exchange rates, and user demand were better understood. Changing the functionality of the standard version increased the probability that the new model would achieve its
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