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    7 Replies Latest reply on Sep 27, 2008 10:42 PM by bcbusacq

    Calculating Correct Costs and Wholesale

    ciordia9 Wayfarer
      I've stepped in to help a fledging family business in chocolate making. Their business up to now has been developing grass roots connects at markets and events. We are working to transition them into catering and delivery with an over-arcing goal of a store/shop/brick and mortar location.

      They have over 12 different products with a markup range from 300-3000% above product cost.

      Now that they have all these requests from retailers (restaurants, other caterers, etc), they need help figuring out their true cost (with overhead/workers) and understand how to calculate a wholesale cost.

      I don't feel I can boil this down to a each product takes X amount of time, too varied and multitasking. I know how much the family wants to make, and how much their general overhead and marketing is costing.

      How do I start these calculations?

      If you need some additional numbers to play with lets go with:
      Salary 40,000/yr
      Overhead 2,000/yr
      Marketing 2,000/yr

      Demo product cost: $3.29
      Demo product retail: $49.00
      Demo product markup: 1390%

      Thanks for ideas and commentary!

      -andy
        • Re: Calculating Correct Costs and Wholesale
          Lighthouse24 Ranger

          I feel like Luckiest should be writing this but . . . my suggestion would be to visit the SCORE (.org) website, click on Business Tools and then the Template Gallery, and download the Excel spreadsheet templates for a 12-month Cash Flow and P&L (Profit and Loss) -- then play with the numbers you have until you find what works best. Good luck.
          1 of 1 people found this helpful
            • Re: Calculating Correct Costs and Wholesale
              ciordia9 Wayfarer
              You can attack numbers a few ways, I'm hoping there is another way before I have to solve it through P&L fidigiting. I know we could calculate it based on hours to create product, or you can use your monthly/yearly P&L to build your products #'s all assumptions, is there a way to reverse it from the retail and cost to create the right margins for wholesale. I feel I can solve it this way but I just lack the technical expertise to do so. I'll refine my P&L projections and see if I can't wedge in a wholesale projection to equate the needs of the business owner and if another idea surfaces I'll take all the information and wrangle it again.

              Thanks for the commentary Lighthouse, it at least got me thinking on that track again.

              -andy
            • Re: Calculating Correct Costs and Wholesale
              ciordia9 Wayfarer
              I guess another question is what's the difference between wholesale and volume. Maybe I can be quick and clean by doing a blanket volume discount setup based on purchase amount or one further level give different volume discounts based on the category. Not sure how to figure that kind of idea in assumptions though.
                • Re: Calculating Correct Costs and Wholesale
                  Lighthouse24 Ranger

                  You asked, "Is there a way to reverse it from the retail and cost to create the right margins for wholesale?" Maybe I'm misunderstanding the problem (if so, I apologize) -- but for a confectionary type product that the market is already familiar with, yes, there are established retail price points for low end, mainstream, and gourmet -- and the wholesale price is typically in the range of 35 to 50 percent of retail. The more margin you can afford to give the retailer, the better placement and promotion you normally get. Of course the less margin you give them, the more money you make -- so that's why I suggested "playing" with various scenarios in a spreadsheet (to see what production numbers and pricing strategies worked best after factoring in all the projected sales figures, manufacturing costs, overhead, distribution, returns, etc.). Discounts below wholesale are normally be tied directly to the volume/quantity purchased, and calculated on the basis of how much you save on shipping/handling/delivering the larger order (it's cheaper for you to deliver two cases one time than one case two times, so you pass that along -- provided the product doesn't have any unusual storage requirements, transportation restrictions, or shelf life limitations that could increase your cost and/or returns).

                  Again, not sure any of that will help you, but maybe . . .
                    • Re: Calculating Correct Costs and Wholesale
                      ciordia9 Wayfarer
                      Appreciate the continued commentary. I've been playing with a lot of scenarios, its just hard to in one sheet to try and calculate out and understand a retail and a wholesale operation.

                      I'm still steeping in industry data since I'm new to being called in to help. This has definitely been of value.

                      I wish we had some baked/aged market metrics, then I could navigate much better hehe. Egg, chicken, cart, horse, and all that. ;-)
                  • Re: Calculating Correct Costs and Wholesale
                    hlookmanjee Newbie
                    The very first step is to break down all your costs into direct or indirect (variable and fixed). For the direct or variable cost you should identify each product you product and the amount of labor and materials that go in it and the resulting costs associated with each. For the fixed or indirect costs just identify them and the annual spend. Once you have broken out these two categories you can extract a lot of valuable information. After this is done you can deterine the margin by three ways - the current market price ( what the market cas support), the expected return for the investors and/or the volume that can reasonably be acheived given the resourced.

                    Hope this helps.
                      • Re: Calculating Correct Costs and Wholesale
                        bcbusacq Newbie
                        To add to hlookmanjee - You would first break down all you compenents utlized in making the products (eggs, milk, chocolate, etc) variable and then detail the amounts utlized in each unit or batch for each product. These costs or cash spend are directly correlated with the number of units produced on a product by product basis. Then determine your fixed costs, salaries, rent, utilies among others as those costs are incurred by the company regardless how many units the company creates and sells.

                        The next step would be to use assumptions to determine the expected annual production (# of units by product) - I typically set a best case, mid and worst case scenario. I then would allocate my overhead to each product on a unit by unit basis using my worst case scenario (estimate it based on units produced if you cannot determine it by product, though, you can apply estimated weighting based on difficulty of prodcution for each product). This tells you the minimum price you need to charge per unit to break even based on the company's fixed cost. Typically that is what you need to start assessing and setting your pricing information.

                        You may decide (most do) to set different pricing tiers for different customers bases, volume movers - lowest pricing, one time or small volume purchasers - higher pricing and work that into your projection analysis. I hope this helps.