Posts Tagged ‘Unit cost’

Profit Margins and Volume

April 9, 2012

First, congratulations to Bubba Watson, Masters Champion.

Your Unit sales volume means a great deal.  Why? because it determines what your Unit Costs are.  These costs must be covered in the price you charge.  Your profit margin must cover unit costs in order to break even.  In the following example, the owners salary is considered a fixed cost.  For this example, too, imagine you sell only one item –> cups of coffee,  and your costs are:

1. $60,000 – Your Salary (always first on the list, for this is why you are in business).

2. $15,000 – Rent

3. $75,000 – Total Fixed Costs (I added the term Fixed, that is, they don’t vary no matter what your volume is.)

Now suppose two scenario’s.  First, you sell 1000 items per month.  Second, you sell 5,000 items per month.

Annual volume is therefore, 12,000 units in the first scenario, and 60,000 units in the second.

You can now calculate what your unit costs will be:

A. – $75,000/12,000 = $6.25 cents per unit in scenario one, and

B. – $75,000/60,000 = $1.25 per item in scenario two.

Now, if the cost of materials for a cup of coffee are: Cup – $.10; coffee – $.20; and other stuff – $.20, then the cost of materials is $.50 for each cup sold.

Let’s further assume your desired profit is $30,000 per year, or $2.50 per item at the 12,000 volume level, and $.50 if your volume is 60,000 units per year.  It is now easy to calculate your price.

Column1 Scenario 1 Scenario 2
Volume 12,000 60,000
Fixed Costs $75,000 $75,000
Unit fixed Costs $6.25 $1.25
Cost of Goods $0.50 $0.50
Desired Profit $2.50 $0.50
Price Must be $9.25 $2.25

Remember: Total Costs + desired profits/ volume = the price you must charge.

Profit Margins: Pricing and Costs

March 22, 2012

 I mean no disrespect to anyone, including myself, who starts a business, and expects to make money, in great abundance and quickly.

This may happen in sites like large Malls or Broadway and 42nd Street in New York, but in the vast majority of cases, it takes a lot of hard work, time, and flexibility.

So if the problem you are researching is really a location issue, look to Improve Your Profits.  Location is not a profitability issue, unless you are paying more than the traffic is worth at a mall, for example.

Margins are: Price – Direct Costs = Margin.  They come with many names.  I’ll just stick with this definition.  Direct costs are your product costs, the classical Cost of Goods Sold.  Right now forget about labor, rent and other stuff, even if you know what the unit cost is.  Just accept my definition.

The most important part of this equation is Price.  If your margins are not getting you what you want in life, and thus making your business life less fun, you should start with price.  You need to know, for a fact, certain, what your competitors are charging.  No guessing.  I could get very fancy here and talk strategy, quality, service and product plans, but I will not.  Just price.

You have little control over costs.  They are market driven.  You may save a dollar here or there by changing, for a time, your coffee supplier, for example, but this is not going to solve a margin problem.

What will solve your profit margin problem is raising your price.  Obvious right.  Takes courage to do this.  I’ve learned the hard way that sudden, unannounced price increases really get customers angry.  This is not good.  In fact, it is very bad.  So decide, but give everyone fair warning.  Then raise them.  Why?  Too Simple, you say.

The reason is indeed simple.  Price increases, the amount of the increase, goes directly to profits.

And, without trying to pollute your mind or your store, take down all those negative ads; you know the ones.  Bathroom for my friends only, not you, outsider.

Never, never give up.  There is an answer.  Generally, always say ‘sure, I can do that”.  If you lay a foundation of always giving, you will get, and make the price increase stick.  And like this person, think.