Target Costing
Morrow Company is a large manufacturer of auto parts for automakers and parts distributors. Although Morrow has plants throughout the world, most are in North America. Morrow is known for the quality of its parts and for the reliability of its operations. Customers receive their orders in a timely manner and there are no errors in the shipment or billing of these orders. For these reasons, Morrow has prospered in a business that is very competitive, with competitors such as Delphi, Visteon, and others.
Morrow just received an order for 100 auto parts from National Motors Corp., a major auto manufacturer. National proposed a $1,500 selling price per part. Morrow usually earned 20 per cent operating margin as a percent of sales. Morrow recently decided to use target costing in pricing its products. An examination of the production cots by the engineers and accountants showed that this part was assigned a standard full cost of $1,425 per part (this includes $1,000 production, $200 marketing, and $225 general and administration costs per part). Morrow