(1) Identify the target price that customers will pay for the product. This involves market research to identify competitors’ products and prices.

(2) Identify the target cost by deducting a target profit margin from the target price. The target profit margin will vary from company to company. Sony is an example of a company that would require a high profit margin to cover the investment in new technology.

(3) Forecast the actual cost of the product.

(4) If the forecast actual cost is greater than the target cost, the company will have to identify ways of lowering the forecast actual cost. Product designers may have to change the design so that it is cheaper to manufacture. Manufacturing engineers may also look into ways of making the production processes more efficient. If the company cannot bring actual costs down to the target cost, then the product should not be manufactured.