The cost savings of $215 are not su

The cost savings of $215 are not sufficient to get the product total cost ($1,210) down to the desired target cost of $1,200. Given that National might be willing to pay a higher price, and since the cost difference is relatively small, it seems that Morrow should in fact pursue the order. Here are some other considerations:
 
a. Morrow should consider the short versus the long term issues of taking on the order. In the short term, as noted in chapter 3, the fixed costs of manufacturing the order will not change and therefore can be considered irrelevant for the order if it is a one time special order. Thus, for a short term analysis, Morrow should determine that portion of manufacturing, marketing, and GSA costs that are fixed and exclude them from the analysis. In contrast, if Morrow expects this to be a regular customer, that Morrow will be supplying National these parts for several months or years, then the total costs including fixed costs are relevant, as in the calculations above. In the longer term, Morrow must cover all costs of production and sale, while in the short term only the variable costs are relevant.

b. Morrow appears to compete in what Robin Cooper calls the “confrontation” strategy (When Lean Enterprises Collide, Harvard Business School Press, 1995) wherein each competitor must simultaneously compete on the basis of price, quality and functionality. In Morrrow’s case, functionality refers not only to meeting product specifications but also to “delighting” the customer with meeting delivery times, reducing lead times, and minimizing billing and shipping errors, as Morrow has done. In a “confrontation” type of competition, target costing is particularly valuable, as Cooper points out, because it provides the firm a mechanism for balancing, and choosing the proper “bundle” of the three aspects of competition: price, quality and functionality. For example, to be most competitive, Morrow must spend extra dollars to ensure that there are few if any billing and shipping errors, while at the same time reducing the costs of manufacturing the product, and maintaining or improving product quality.
 
c. The problem notes that the manufacturing costs are “standard” full costs. Since the costs are given at standard, this means that there are no apparent inefficiencies reflected in the reported $1,425. However, the question still remains whether the standard costs are properly determined. Should the standards be revised?