P2 - 3. Profit Enhancement Techniques Flashcards
What is a target cost?
A product cost estimate derived by subtracting a desired profit margin from a competitive market price
What is target costing?
An activity which is aimed at reducing the life cycle costs of new products, while ensuring quality remains the same
What are the 3 steps in target costing?
- Determine the sales volume and target price through market research
- Identify the required profit level
- Ensure the product can be produced at a cost which is less or equal to the difference between 1 and 2
What is the target profit level in target costing usually based on?
An overall corporate required return on investment
What are the 3 problems with target costing in a service industry?
- Hard to predict demand at concept stage
- Cost is almost all labour (hard to reduce)
- Services can be unique so would need to reapply target costing every time
What are the 5 main options for closing a target cost gap?
- Redesign the product
- Redesign the production process
- Renegotiate with suppliers
- Improve staff efficiency
- Use cheaper staff
What is life cycle costing?
Monitoring costs by product over the different phases of the products life to identify the total profitability of a product
What are the 3 main uses of life cycle costing?
- Provides better info about success of product development
- Gives focus on the design development stage, where most costs are incurred, so provides a clearer basis for cost reduction
- Gives importance to lengthening product life cycle and shorter lead time from R&D spend and launch
What are the 2 limitations of life cycle costing?
- Requires more detailed analysis of costs so is more time consuming/costly
- Doesn’t provide information for financial reporting
What are the 6 main categories of cost incurred throughout the product lifecycle?
- R&D
- Market research
- Staff training + production
- Distribution
- Marketing
- Decomissioning
What are the 5 product life cycle phases?
- New product development
- Market introduction
- Growth
- Maturity
- Decline
What is the pattern of price through introduction to decline stage?
- > Introduction strategy based
- > Declines due to/to prevent competition
- > Stable/promotions
- > Reduced to sell off
What is the pattern of production cost through introduction to decline stage?
- > High (low volume/training)
- > Reduces, economies of scale and bulk buying
- > Constant
- > Increases (low volume, less interest)
What is the pattern of sales and marketing spend through introduction to decline stage?
- > Low to medium (awareness)
- > High (reach customers)
- > Reduced (word of mouth/established)
- > Reduce (focus elsewhere)
What is the pattern of profitability through introduction to decline stage?
- > Loss making
- > Approaching breakeven
- > Steady profits
- > Reduced/possible losses
What does customer life cycle costing do?
Collects the costs of the customer over their lifetime to see the total profit for that customer
What are the 4 main considerations in customer life cycle costing?
- Loss making at initial meeting
- Record non chargeable time (invoicing etc)
- Record value of referrals from customer
- Reflect non chargeables in future engagement charges
What is a value chain?
The sequence of business activities by which value is added to products produced by an entity
What is the aim of value chain analysis?
To ensure activities within an organisation have consistency of approach and to ultimately enhance profitability
What are the 5 primary activities in a manufacturing value chain?
- Inbound logistics
- Operations
- Outbound logistics
- Sales and Marketing
- (After Sales) Service
What are the 4 support activities in a manufacturing value chain?
- Firm Infrastructure (general, legal, finance, QA)
- Technology development
- HR Management
- Procurement
What is operations management concerened with?
All functions of Primary Activities in the value chain, except for sales and marketing, plus procurement
What are the 2 key competitive strategies that come from Porter’s value chain?
- Low cost / cost leadership
2. Differentiation strategy
What 4 ways does value chain analysis help the organisation to deliver value?
- Better understanding of key capabilities
- Identification of areas of improvement, outsourcing or elimination
- Focus on full range of activities from conception to delivery
- Understand how they and competitors create value
What is the extended value chain?
Also includes the value chains of suppliers and distributors
