ZALT@aol.com on sun 16 feb 97
Well, this is it.
From the last posts we determined that the FIXED COSTS were $38,350.00 and
our VARIABLE COSTS were $0.81 per mug. We determined that our production
capability was 6662 mugs per year. We can now determine our BREAK-EVEN
COSTS. We simply divide our FIXED COSTS by our production capability and
add the VARIABLE COST of one mug to the results. The formula looks a bit
like, ($38,350.00/6662) + $0.81. We thus arrive at a BREAK-EVEN COST of
$6.56 per mug. What ever we do, we should not sell our mug for less than
this amount.
But wait a minute! There is more. We are a business, and as such we must
consider PROFIT. PROFIT is the amount of money we put aside to act as a
buffer when times get tough. PROFIT is the money we set aside for our
retirement. PROFIT is the amount of money we would get if we were investors
in our company or if we invested the value of our business and time into a
stock market or into a mutual fund. It is also the money we use to pay for
us to undergo additional education and training. PROFIT is also the money we
give ourselves as a grant or as a gift in support of our ceramics guild.
Companies must make PROFIT to pay share holders a dividend. You are the
shareholder of your company.
How much should we determine as our PROFIT? This is a good question.
according to Wendy Rosen, The author of "Crafting As a Business", a good
profit margin, should equal one third of the wholesale price. If we
represent our wholesale price as $X then $6.56 would represent 2/3 of the
wholesale price. To find $X all we have to do is divide $6.56 by 2/3 or
multiply the figure by .66. In our case the PROFIT margin will be $4.32 per
mug. When we add this to our break-even costs we arrive at a final wholesale
price per mug of $10.88. I know that, when you look at this figure and
calculate the what the final retail price will be, you will be a bit
reluctant to put the resulting price on the mug because it seems high. It is
at this stage you have to determine if you want to have the profit or if you
are willing to work for less per hour. It is only in these two areas that we
will be able to reduce the retail cost of our mug. In our case we would
have to suggest a mug sell for $21.00 to $22.00 when we sell wholesale and
$19.00 to $20.00 when we consign at 60%.
Reducing your income may seem a good idea because you want to sell your
product. You may look around and see people selling their mugs for less.
They may be able to sell their product for less because, they can produce
faster; or because they are using the mugs as lost leaders ,or they have
simply have no idea as to what they are doing.
If we decide to produce faster then we will have a real challenge in order to
reduce our costs. For example if we can produce 10 ready to sell mugs per
hour, (double our initial calculation) the wholesale price for our mugs
would be equal to (((($38.350.00/ (6662 X2)) + $0.81) X 1.66) = $6.12.
This will give us a retail selling price of $12.24 Who said math wasn't
necessary to be a potter? The main point being made here is that we can
reduce the costs, but at an expense to our well being. To double the
production capability, we will be working ourselves into the ground.
Remember we are craftspeople not machines. That is why we must take care
and make a good piece and charge a fair price for the product. If the
client doesn't want to pay the price then let him buy a machine product.
Now someone asked me if I could sell 6662 mugs per year. The answer is no.
There is not a market for this many mugs in my area and I would not be
interested in just producing mugs. However I am confident that when I make
and sell 100 mugs, that I will get fair value for my efforts. Even if I
only sell 10 mugs I will get fair value.
Now before I close this thread I would like to point out that this exercise
will work for all forms and all types of production. Once we go through the
exercise once we can see that we can play with various options. I will
discuss some of these options in my next posting.
Until then
Once again, if there are some who missed the previous copies of Pricing my
turn , they can e-mail me for copies.
Terrance F. Lazaroff
St Hubert, Quebec, Canada
Eleanor D. Hendriks on tue 18 feb 97
----------------------------Original message----------------------------
Well, this is it.
>From the last posts we determined that the FIXED COSTS were $38,350.00 and
our VARIABLE COSTS were $0.81 per mug. We determined that our production
capability was 6662 mugs per year. We can now determine our BREAK-EVEN
COSTS. We simply divide our FIXED COSTS by our production capability and
add the VARIABLE COST of one mug to the results. The formula looks a bit
like, ($38,350.00/6662) + $0.81. We thus arrive at a BREAK-EVEN COST of
$6.56 per mug. What ever we do, we should not sell our mug for less than
this amount.
But wait a minute! There is more. We are a business, and as such we must
consider PROFIT. PROFIT is the amount of money we put aside to act as a
buffer when times get tough. PROFIT is the money we set aside for our
retirement. PROFIT is the amount of money we would get if we were investors
in our company or if we invested the value of our business and time into a
stock market or into a mutual fund. It is also the money we use to pay for
us to undergo additional education and training. PROFIT is also the money we
give ourselves as a grant or as a gift in support of our ceramics guild.
Companies must make PROFIT to pay share holders a dividend. You are the
shareholder of your company.
How much should we determine as our PROFIT? This is a good question.
according to Wendy Rosen, The author of "Crafting As a Business", a good
profit margin, should equal one third of the wholesale price. If we
represent our wholesale price as $X then $6.56 would represent 2/3 of the
wholesale price. To find $X all we have to do is divide $6.56 by 2/3 or
multiply the figure by .66. In our case the PROFIT margin will be $4.32 per
mug. When we add this to our break-even costs we arrive at a final wholesale
price per mug of $10.88. I know that, when you look at this figure and
calculate the what the final retail price will be, you will be a bit
reluctant to put the resulting price on the mug because it seems high. It is
at this stage you have to determine if you want to have the profit or if you
are willing to work for less per hour. It is only in these two areas that we
will be able to reduce the retail cost of our mug. In our case we would
have to suggest a mug sell for $21.00 to $22.00 when we sell wholesale and
$19.00 to $20.00 when we consign at 60%.
Reducing your income may seem a good idea because you want to sell your
product. You may look around and see people selling their mugs for less.
They may be able to sell their product for less because, they can produce
faster; or because they are using the mugs as lost leaders ,or they have
simply have no idea as to what they are doing.
If we decide to produce faster then we will have a real challenge in order to
reduce our costs. For example if we can produce 10 ready to sell mugs per
hour, (double our initial calculation) the wholesale price for our mugs
would be equal to (((($38.350.00/ (6662 X2)) + $0.81) X 1.66) = $6.12.
This will give us a retail selling price of $12.24 Who said math wasn't
necessary to be a potter? The main point being made here is that we can
reduce the costs, but at an expense to our well being. To double the
production capability, we will be working ourselves into the ground.
Remember we are craftspeople not machines. That is why we must take care
and make a good piece and charge a fair price for the product. If the
client doesn't want to pay the price then let him buy a machine product.
Now someone asked me if I could sell 6662 mugs per year. The answer is no.
There is not a market for this many mugs in my area and I would not be
interested in just producing mugs. However I am confident that when I make
and sell 100 mugs, that I will get fair value for my efforts. Even if I
only sell 10 mugs I will get fair value.
Now before I close this thread I would like to point out that this exercise
will work for all forms and all types of production. Once we go through the
exercise once we can see that we can play with various options. I will
discuss some of these options in my next posting.
Until then
Once again, if there are some who missed the previous copies of Pricing my
turn , they can e-mail me for copies.
Terrance F. Lazaroff
St Hubert, Quebec, Canada
Bill Hall on tue 18 feb 97
I'm not an expert on the subject, but your calculations don't make sense to
me. Could you please clarify a few points?
> How much should we determine as our PROFIT? This is a good question.
> according to Wendy Rosen, The author of "Crafting As a Business", a
good
> profit margin, should equal one third of the wholesale price. If we
> represent our wholesale price as $X then $6.56 would represent 2/3 of
the
> wholesale price. To find $X all we have to do is divide $6.56 by 2/3 or
> multiply the figure by .66.
You lost me. "divide by 2/3" is not the same as "multiply by .66". (Should
be .67, anyway) "Divide by 2/3" is the same as "divide by .66" (actually
..67) OR "Divide by 2/3" is the same as "multiply by 1.5". $6.56 divided by
2/3 is $9.84. $6.56 times .66 is $4.37. I don't get $4.32 in either case.
> In our case the PROFIT margin will be $4.32 per
> mug. When we add this to our break-even costs we arrive at a final
wholesale
> price per mug of $10.88.
You said that the wholesale price is $X, which is break-even cost divided
by 2/3. So why are you calculating it by adding? Your formula now seems to
be wholesale price = break-even + (break-even times .66). This is the same
as wholesale price = break-even times 1.66. (Or divide by .6)
The formula for profit margin that I am familiar with is ((selling price
minus cost) divided by selling price) times 100. So, if your cost for the
mug is $6.56 and you get $10.88 for it, whether that's your share of the
consignment, wholesale, or retail done direct by you, your profit margin
would be 40%. If you sell it for $9.84, then your profit margin is 33%,
which is what is stated in the book you cited. If this is your wholesale
price and the retailer has a profit margin of 50%, then the mug would
retail for $19.68.
___
Bill Hall
bill@applink.net
ZALT@aol.com on wed 19 feb 97
Bill:
I stand corrected. You are right. The numbers do not add up. They
should have read multliply by 2/3 or. .66. I am sure glad that It was you
and not my math prof who read this.
Please Forgive me.
Terrance F. Lazaroff.
St Hubert, Quebec, Canada!!!!!
| |
|
