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Data - Product Development - Target Product Prime Cost
Target Prime Cost
Setting the target prime cost when developing a new product or modifying an existing one is an important decision. Specify an unrealistically low target - and the product development team will have to spend a lot of time and money trying to achieve your request and have less time to spend on making any other changes to the product. On the other hand, if a product costs too much to produce (in time and materials) it will hamper the factory's ability to produce it in the required quantity and marketing's ability to sell it at a profit.
A good place to start is with estimating the likely retail and wholesale prices and the expected sales volumes. Now, estimate and subtract direct marketing costs associated with the product and the product's share of company overheads (remembering that some may increase because of the product). Subtract the profit the firm requires from this product, and some allowance to repay the cost of developing the product. What remains is essentially the amount you can afford to pay in direct costs to produce it.
The other approach is to estimate what the prime cost for the product is likely to be. Use the desired product attributes and the cost data in the table below to estimate this. Note that the prime cost is highly dependent upon the level of technical specifications (since this takes a lot of work), but depends very little on the style/design attribute. Your original adventurer bike, for example, has a product prime cost of $300, as compared to around only $60 for a leisure bike (because of lower tech specs).
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Product Prime cost for each unit of Technical specs |
$4.50-$5.00 |
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Product Prime cost for each unit of Style/Design |
$0.10-$0.15 |
Investment in Cost Reduction
If the prime cost calculated using the sales and cost data is lower than the prime cost calculated from the table above, you will want to consider investing in cost reduction (also called Value Engineering). The graph below gives an example of how much must be invested in cost reduction to achieve cost reduction on your original adventurer bike which starts with a prime cost of $300.
