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Costing the product and its relationship to the Selling Price. The best approach we have found is to establish just what the 'sweet spot' is for the Selling Price and work back to what you have to make it for. If you can't produce it for the right price then, change the product or the process until you can. See this discussed on the video tutorial here. We get quotes in for Product and Pack - estimate rest to arrive at the first Product cost figure - look at varying batch size effect. Analyse results and decide what revision to components / design / supplier are required. Bearing in mind the Distributor & Retailer's margins it is quite common that by the time you put all the numbers together the the product is too expensive. This may then require a design and pack revision to reach the goal. Normally here you will isolate the 'big ticket' components or processes as shown below.  A Distributor will usually want a margin of 30% or more. A Retailer may want 50% or more. By the time a product reaches the Customer the price can increase 2 to 5 times. Usually about 3 times, but you need to establish in your area of operation what the ‘norm’ is, so that you can plan accordingly. This is why savings made at the Process end are tremendously increased by the time you get to the customer. On-line retailing your own product is a different game. Here you can remove at least one margin, however you need to establish whether this mode of selling will be effective for your product line.
Costing Activity Based Costing Costing the Product
We commonly break down these figure to graphically show the differences. You can easily see below where to focus your effort.
Activity based costing is the key 'yardstick' to measure just where your money is going. The basis for making smart decisions on how to increase profitability. In costing the activities with this system you can make 'what-if' decisions on alternative equipment, plant capacity and other ways of operating. This is the most important tool you can have in your 'kitbag'.
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