Heartland Fabrication is a steel fabricator that has grown significantly over the last 10 years. Heartlands core business comes through government work, especially in fulfilling military contracts.

These military contracts are primarily based on a cost-plus model. Heartland has developed a detailed process-based costing system, which they have relied upon for several years. As they determine product costs, they add a profit margin and submit bids.

Recently, two of Heartlands lightweight steel products have gained traction in the agricultural industry. Strategically, Heartland has determined to put significant resources into gaining traction in the agricultural market. The market is very competitive but also has a high volume, and if Heartland could gain a foothold it would mean significant growth.

However, because of the competitive nature of the market, Heartland will need to move to a target pricing model.

For this discussion:

• What initial activities would Heartland need to perform in order to determine a target price?
• What factors may affect profit margin in a move from cost-plus pricing to target pricing?
• What are the advantages and disadvantages in a target pricing model?
• Explain value engineering and how this might play a role in the transition from a cost-plus model to a target pricing model.