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Design-to-Cost Target Gap Calculator

Target costing works backwards from what the market will pay. This calculator derives the allowable cost from price and margin and shows how far the current design is from it, in dollars per unit and per year.

Your numbers

$/unit
%

Margin as a share of price.

units/year
$/unit
$/unit
$/unit
$/unit

Your results

Cost gap per unit (positive = must reduce)
$44
Annual savings needed
$799,200
Allowable cost at target margin
$286
Current unit cost
$330
Margin at current cost
21.4%
Required reduction in unit cost
13.5%
Material target if all gap is taken from material
$161

Overhead absorption differs by company. Use the same costing basis for the current cost and for the target, or the gap will be misleading.

Save results:

Cost gap per unit vs required margin

Sweeps Required gross margin from 5 to 50, holding your other inputs fixed.

Cost roll-up from your ERP

Optional: we can connect standard cost roll-ups and variances to a read-only dashboard.

Optional. The tool and every export work without this. No spam.

How to use it

Enter the target price and the gross margin you need, then the current unit cost split into material, labour, overhead and other items. The result shows the allowable cost, the gap and the annual savings that value engineering, supplier negotiation or redesign must deliver. Use the final line to see the material target if all savings came from the bill of materials.

The formulas

Allowable cost equals price times one minus margin. The gap equals current cost minus allowable cost. The percentage reduction is the gap divided by current cost, and the annual figure is the gap multiplied by annual volume. A negative gap means the design already beats the target.

Using the gap in practice

Split the gap into workstreams: material substitution, part count reduction, process change and supplier price. Assign owners and track each through your change process so savings land in the standard cost. Expect that large reductions rarely come from one line; a part count reduction often yields assembly labour savings as well.

Common mistakes

Mixing margin and markup is the classic error. A 32 percent margin on price is a 47 percent markup on cost. Also check that the savings you plan are reflected in standard cost rolls, otherwise the gap closes on paper but not in the ERP margin reports.

Frequently Asked Questions

What is the difference between margin and markup?

Margin is profit as a share of price, while markup is profit as a share of cost. A 32 percent margin equals a markup of about 47 percent. This calculator uses margin on price.

Should overhead be part of the target?

Include it if your pricing assumes a fully absorbed cost. Otherwise, set overhead to zero and use a contribution margin target. Keep the basis consistent between current and target cost.

How do I split the gap between teams?

Rank ideas by savings and risk, assign the larger share to material and part count, and keep a contingency. Review progress at each design gate rather than waiting for production.

Can the gap be negative?

Yes. A negative gap means the current cost is below the allowable cost, giving headroom for price pressure or extra features.

Netray can pull standard cost roll-ups and actual cost variances from your ERP so the gap you track here matches the numbers finance reports.

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