ABC Ltd has an aggressive research and development programme and uses target costing to

aid in the final decision to release new products for production. A new product is being

evaluated. Market research has surveyed the potential market for this product and believes

that its unique features will generate a total demand of $50\mathrm{.}000$ units at an average price of

$$4\mathrm{.}600$ per unit. The design and production engineering departments have performed a value

analysis on the product and have determined that the total cost for the various value chain

functions using the existing process technology are as follows:

Value chain function

Total cost over

product life $($$$)$

Management's target profit is set at $20\%$ of sales. Production engineering indicates that new

process technology can reduce the manufacturing cost by $40\%,$ but it will cost $$20,000,000.$

Required:

Target costing and value engineering are commonly adopted by manufacturing firms in

new product development. Describe and explain the terms "target costing" and "value

engineering".

Analyse and explain whether the new product should be released to production under

the following two assumptions:

$($i$)$ existing process technology is used

$($ii$)$ new process technology is purchased.