SkiPS is a maker of global positioning systems (GPS) for skiers, which they use to log how many vertical feet they ski each day. SkiPS conducts a marketing survey to decide upon the features it needs to include in its next generation of GPS device, and finds that skiers want a device they can strap to their arm or leg, and which does not require recharging during a multi day vacation.
The survey indicates that skiers are willing to pay no more than $150 for the device, while the first review of costs indicates that it will cost $160 to manufacture. At a mandated gross margin percentage of 40%, this means that the device must attain a target cost of $90 ($150 price x (1 – 40% gross margin). Thus, the design team must reduce costs from $160 to $90.
The team decides that the GPS unit requires no display screen at all, since users can plug the device into a computer to download information. This eliminates the LCD display and one computer chip. It also prolongs the battery life, since the unit no longer has to provide power to the display. The team also finds that a new microprocessor requires less power; given these reduced power requirements, the team can now use a smaller battery.
Finally, the team finds that the high impact plastic case is over engineered, and can withstand a hard impact with a much thinner shell. After the team incorporates all of these changes, it has reached the $90 cost target. SkiPS can now market a new device at a price point that allows it to earn a generous gross profit.