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Pyramid Printing Company publishes magazines, catalogs, and retail inserts for distribution in large metropolitan-area newspapers. Its largest customer is the New York News Company, for which Pyramid prints sales fliers and coupon inserts.
Pyramid has contractual agreements with its customers; its present pricing strategy is cost-plus, and customers also agree to a yearly price escalation based on inflation. Pyramid completes the escalation based on cost-of-operations increases.
Recently, Obelisk Publishing proposed a bid to the New York News Company for alternative pricing to counter Pyramid Printing’s contract, which will be up for renewal. To compete with the bid from Obelisk, Pyramid will have to employ target costing.
For this discussion:
• What are the differences between cost-plus and target-costing approaches to developing appropriate pricing? Give advantages and disadvantages of each.
• Are there elements of the value chain that Pyramid may leverage in order to optimize target costing for a mature customer relationship?