Stinson plc is a multinational consumable goods company. Stinson owns many well-known brands. The company manufactures and sells food and beverages, home care products and personal care products. The annual revenue of the company is approximately £60 billion.
Stinson plc is planning to enter the pharmaceutical industry. The company plans to launch a new brand under which they will manufacture and sell medicines. The manufacture of medicine requires a lot of research and experimentation. The cost involved for such research and development will be high. However, the company cannot set the selling price too high because of the low selling price set by its competitors. At the same time, setting the selling price lower than its competitors’ selling price will not be profitable for the company. The management of the company is looking for the most effective way to set the price of the medicines it manufactures. It is aware that traditional costing sometimes seems to focus too much on costs as they are incurred because incurred costs are more visible as they are booked through routine cost accumulation systems.

Required
1. Based on its experience, Stinson plc has decided to use the target costing method to set the price of the medicines it manufactures. Discuss how the process of setting price using the target costing approach is different from the traditional approach to setting price.

2. The management of Stinson plc wants to anticipate cost improvements during the manufacturing cycle. Describe how life-cycle costing helps in this continuous improvement.

3. Stinson plc has decided to use either the target costing method or the life-cycle costing method to set the price of the medicines it manufactures. Outline the problems the company could face using either of these options.