Reference no: EM133096113

Question - A steel fabricator has grown significantly over the last 10 years with core business coming through government work, especially in fulfilling military contracts.

These military contracts are primarily based on a cost-plus model. The fabricator has developed a detailed process-based costing system, which they have relied upon for several years. As they determine product costs, they add a profit margin and submit bids.

Recently, two of the fabricators lightweight steel products have gained traction in the agricultural industry. Strategically, they have determined to put significant resources into gaining traction in the agricultural market. The market is very competitive but also has a high volume, and if they could gain a foothold, it would mean significant growth.

However, because of the competitive nature of the market, the fabricator will need to move to a target pricing model.

Required - What factors may affect profit margin in a move from cost-plus pricing to target pricing?