Question

LO 2 8-47 Target costing Mercedes-Benz All Activity Vehicle (AAV)'3 Introduction During the recession beginning in the early 1990s, Mercedes-Benz (MB) struggled with product development, cost efficiency, material purchasing, and problems in adapting to changing mar- kets. In 1993, these problems caused the worst sales slump in decades, and the luxury car maker lost money for the first time in its history. Since then, MB has streamlined the core business, re- duced parts and system complexity, and established simultaneous engineering programs with suppliers. In their search for additional market share, new segments, and new niches, MB started devel- oping a range of new products. New product introductions included the C-Class in 1993, the E-Class in 1995, the new sportster SLK in 1996, and the A-Class and M-Class All Activity Vehicle (AAV) in 1997. Perhaps the largest and most radical of MB's new projects was the AAV. In April 1993, MB announced it would build its first passenger vehicle-manufacturing facility in the United States. The decision emphasized the company's globalization strategy and desire to move closer to its customers and markets. Mercedes-Benz United States International used function groups with representatives from every area of the company (marketing, development, engineering, purchasing, production, and controlling) to design the vehicle and production systems. A modular construction process was used to produce the AAV. First-tier suppliers provided systems rather than individual parts or components for production of approximately 65,000 vehicles annually. The AAV Project Phases The AAV moved from concept to production in a relatively short period of time. The first phase, the concept phase, was initiated in 1992. The concept phase resulted in a feasibility study that was approved by the board. Following board approval, the project realization phase began in 1993, with production commencing in 1997. Key elements of the various phases are described next.

Answer 1

Solution - a

The automobile company MB (Mercedes Benz) was struggling to introduce new models in the market when compared to its competitors.At the time of recession during the year 1990, the company was struggling to develop new models due to inefficiency in controlling the production cost. The cost was majorly driven by the procurement of raw materials from the company's suppliers. In order to introduce more car models into the competitive market, the company has adopted AAV (All Activity Vehicles ).

Solution - b

By approaching AAV (All activity Vehicles), the company MB has insisted the representatives of all functioning groups such as developing, purchasing, engineering and marketing divisions to come out with new designs or models which could be processed in different stages staring from idea phase, project realization process and production process.The objective of the AAV project was to design and produce new luxury car models at shorter span and effectively compete in luxury automobiles market.

Solution - c

The company MB splits the production costs by activities such as transmission, frames, cooling system and electrical framework and builds each and every items by meeting the style, economy, safety and solace as per the requirement of the consumers. The main objective of the company MB is to resolve all worries of the consumer minimizing the production costs. By this approach, the company aligns with Cooper's production strategies.

Solution - d

The company introduced new testing strategies in order to prove the car could withstand the effects of the crash by introducing highly efficient air bags. The crash test and airbags involves significant cost. But by incurring these costs, the company could come out into the market with high price tags but more consumers afford to buy these cars due to their highest safety features when compared to other car manufacturers.

Solution - e

Importance index explains the percentage of importance given by the consumers while choosing the cars in terms of their features which includes Safety, Comfort, Economy and Styling. It is common, that the consumers go in for cars which has highest safety features.

Solution - f

The company approaches the cost reduction through Target costing. The company arrives at the total cost which includes all features (as per the importance index). The sale price is determined by adding the required margin to the total costs.

Solution - g

The supplier's cost is the key driving cost as they are the suppliers of the raw materials required for the car production process. The effective supply management could reduce the procurement cost significantly. The credit period allowed by the suppliers, the timing of placing the orders are some of the key factors that affects the costing.

Solution - h

It is the responsibility of the accounting department to monitor the costing. The variance between the target costing and the actual incurring of the cost need to be determined and addressed effectively. The accounting departments should escalate the variance in the cost to the management teams in order to facilitate the management to take corrective actions in order to control such variances.