TARGET COSTING GLOWS WITH THE "NEON"
In 1990 Chrysler Corporation found itself in a very unhappy financial situation. Profits were down, cash flow was tight, and the stock was trading at a low price of $10 per share. The Japanese auto industry posed a serious threat. Despite a strong Yen, they had captured and continued to preserve a healthy share of the U.S. auto market. Chrysler management decided it was time to change their approach to new car design. They adopted a competitive weapon that the Japanese auto industry had used for many years called target costing. Target costing was applied to all product development efforts in the Company including the NEON, a new small car developed for the lower price range. A price and profit target was set for the car and it was then designed to meet that profit without sacrificing major customer requirements. The results of using target costing on the NEON were impressive. The NEON:
- Provided dual airbags and a powerful engine for a small car.
- Was named" Auto of the Year" in 1994.
- Had a relatively short development time going from product concept to market in 31 months.
- Came in below its project development and investment budget.
- Is one of a handful of small cars made in the USA that makes a positive return.
- Is environmentally friendly built using a recyclable facia and non-toxic materials.
- Since the introduction of target costing, Chrysler's profits have increased significantly. Its share price went up from $10 per share in 1990 to $54 per share in 1995.
- Assume that you worked for Chrysler in 1990 and were assigned to the development team for the Neon project. This project was developed under the target costing approach rather than the traditional cost-plus approach. Answer the following questions regarding the development of the Neon car. Be creative, using your knowledge of cars in general, in answering the questions. You should provide car specific examples.
Required:
- Identify the steps Chrysler Corporation might have gone through in the implementation of target costing for the Neon Car. Provide specific examples of activities undertaken for each of the steps.
- Briefly outline, how each of the three steps in attaining/deriving target costs might have applied to the Neon project.
- Briefly explain ONE tool that Chrysler could use to design costs out or reduce costs through design improvements.
- List some behavioural problems that may occur when target costing is used. Provide an example of how these problems may have impacted the Neon project.