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Add You - Pricing for Bottom Line Profit
Each of your supervisors must know what to do during an emergency and must be certain that his or her workers understand their roles. A responsible person must be designated for each workplace or jobsite. Generally, your supervisor is the person in charge of a workplace or jobsite. This designated person has specific responsibility for the preparation, updating, and implementation of the emergency plan.Each plan should contain the following information and procedures as appropriate for each workplace. Naturally,
Ratio Fixed Costs to Variable Costs (over a reasonable period, say 3, 6 or 12 months). This is your OVERHEAD FACTO
If you want to take advantage of people power when you are looking new job some successful networking can do you lots of favours.Research People – if you know you are going to be at an industry event it’s worth doing a bit of background research on whom else might be attending. A quick internet search on the name of speakers might give you an interesting nugget of information that will do you wonders when trying to break the ice in the hotel bar.Know Who You’d Like To Know – h
To help understand the question better, consider the following theoretical example:
You sold your last (remodeling) job for $12,000. You used $4,000 in materials and 250 man-hours of people you pay $20 per hour wages to.
If you were asked what you made on this job how would you respond? Would you say:
A) $12,000
B) $3,000
C) Other ___________ (fill in)
In the example above:
If you chose A, you equate profit with sales revenue. Hopefully by now, most of us have been cured of that error (but not all of us I’ll bet!).
If you chose B, you equate profit with the difference between sales and direct costs. Direct costs are those that we pay for the materials we sell or install plus what direct labor costs us. In the example, there were $4,000 in material costs and $5,000 in labor costs (250 x $20). The “profit” was, therefore, $12,000 - $4,000 - $5,000 = $3,000.
Really? What about that nasty little thing called overhead?
If you chose C) and tried to fill in another number, that’s interesting because the fact is not enough information is given to answer the question properly!
We have NO IDEA OF WHAT OVERHEAD is in the example above; let alone how to account for it in our pricing.
Components of a Price:
We can build up a price from its components using information already established in our financial statements. A price can be constructed from its four components as follows:
Direct Cost of Materials
+ Direct Cost of Labor (Plant, Construction, Delivery, Commission or Other)
+ Overhead Absorption (on a proportionate basis to sales) (Indirect Costs)
+ PROFIT
= Sales Price (either unit price or sales dollars)
Normally, we can establish or estimate the Direct costs fairly accurately. But what about Overhead? The simple way to do this is as follows:
Go back to your Income Statement and separate costs (if not done by your accountant – and often they aren’t) into Variable or that which is related directly to sales volume (materials, purchases, direct labor, freight, delivery) and Fixed, typically not related directly to sales volume (Advertising, Computer Expense, Insurance, Office Wages & Salaries, Officer’s Compensation, Payroll Taxes, Rent or Mortgage Interest, Telephone, Utilities, Waste Management and others).
Ratio Fixed Costs to Variable Costs (over a reasonable period, say 3, 6 or 12 months). This is your OVERHEAD FACTO
The Jewelry Repairer needs special training, ability to work on a tedious job for hours and a love for jewelry. He may work in a variety of places and possibly be self-employed.Education Requirements: The repairer should have finished high school where he took classes in chemistry, physics, shop and mechanical drawing. He may have attended a community college or trade school where he took courses in jewelry repair techniques, as well as use and care of tools and machines. He also learned casting, polishing, stone set
In the example above:
If you chose A, you equate profit with sales revenue. Hopefully by now, most of us have been cured of that error (but not all of us I’ll bet!).
If you chose B, you equate profit with the difference between sales and direct costs. Direct costs are those that we pay for the materials we sell or install plus what direct labor costs us. In the example, there were $4,000 in material costs and $5,000 in labor costs (250 x $20). The “profit” was, therefore, $12,000 - $4,000 - $5,000 = $3,000.
Really? What about that nasty little thing called overhead?
If you chose C) and tried to fill in another number, that’s interesting because the fact is not enough information is given to answer the question properly!
We have NO IDEA OF WHAT OVERHEAD is in the example above; let alone how to account for it in our pricing.
Components of a Price:
We can build up a price from its components using information already established in our financial statements. A price can be constructed from its four components as follows:
Direct Cost of Materials
+ Direct Cost of Labor (Plant, Construction, Delivery, Commission or Other)
+ Overhead Absorption (on a proportionate basis to sales) (Indirect Costs)
+ PROFIT
= Sales Price (either unit price or sales dollars)
Normally, we can establish or estimate the Direct costs fairly accurately. But what about Overhead? The simple way to do this is as follows:
Go back to your Income Statement and separate costs (if not done by your accountant – and often they aren’t) into Variable or that which is related directly to sales volume (materials, purchases, direct labor, freight, delivery) and Fixed, typically not related directly to sales volume (Advertising, Computer Expense, Insurance, Office Wages & Salaries, Officer’s Compensation, Payroll Taxes, Rent or Mortgage Interest, Telephone, Utilities, Waste Management and others).
Ratio Fixed Costs to Variable Costs (over a reasonable period, say 3, 6 or 12 months). This is your OVERHEAD FACTO
Consider your life as a business enterprise. Overshadowing everything else is a business goal and a strategy to reach that goal. Also there is a business philosophy, the red thread that gives meaning of existence to the enterprise. Now consider your life. You need one or several goals, immaterial and material ones. What is important to you in life? Consider that which you want to achieve, where you want to be and also what kind of people you want to be around. In this way you can find your way to a life which
Really? What about that nasty little thing called overhead?
If you chose C) and tried to fill in another number, that’s interesting because the fact is not enough information is given to answer the question properly!
We have NO IDEA OF WHAT OVERHEAD is in the example above; let alone how to account for it in our pricing.
Components of a Price:
We can build up a price from its components using information already established in our financial statements. A price can be constructed from its four components as follows:
Direct Cost of Materials
+ Direct Cost of Labor (Plant, Construction, Delivery, Commission or Other)
+ Overhead Absorption (on a proportionate basis to sales) (Indirect Costs)
+ PROFIT
= Sales Price (either unit price or sales dollars)
Normally, we can establish or estimate the Direct costs fairly accurately. But what about Overhead? The simple way to do this is as follows:
Go back to your Income Statement and separate costs (if not done by your accountant – and often they aren’t) into Variable or that which is related directly to sales volume (materials, purchases, direct labor, freight, delivery) and Fixed, typically not related directly to sales volume (Advertising, Computer Expense, Insurance, Office Wages & Salaries, Officer’s Compensation, Payroll Taxes, Rent or Mortgage Interest, Telephone, Utilities, Waste Management and others).
Ratio Fixed Costs to Variable Costs (over a reasonable period, say 3, 6 or 12 months). This is your OVERHEAD FACTO
Quick! Can you find your homeowner’s insurance policy? How about that warranty you bought for your television last year? Would you know where to begin looking to find your child’s birth certificate? Even more important, if your home were suddenly destroyed due to some natural disaster, would you be able to present your insurance agent with a list of your entire home inventory?If you spend precious time looking for important papers around your house, you’re not alone! Research shows that the average person spends 150
Direct Cost of Materials
+ Direct Cost of Labor (Plant, Construction, Delivery, Commission or Other)
+ Overhead Absorption (on a proportionate basis to sales) (Indirect Costs)
+ PROFIT
= Sales Price (either unit price or sales dollars)
Normally, we can establish or estimate the Direct costs fairly accurately. But what about Overhead? The simple way to do this is as follows:
Go back to your Income Statement and separate costs (if not done by your accountant – and often they aren’t) into Variable or that which is related directly to sales volume (materials, purchases, direct labor, freight, delivery) and Fixed, typically not related directly to sales volume (Advertising, Computer Expense, Insurance, Office Wages & Salaries, Officer’s Compensation, Payroll Taxes, Rent or Mortgage Interest, Telephone, Utilities, Waste Management and others).
Ratio Fixed Costs to Variable Costs (over a reasonable period, say 3, 6 or 12 months). This is your OVERHEAD FACTO
Pallet racks can be defined as multi-level structured units used to hold stacks of heavy pallets, which are a popular means of storage for literally any industry. A series of parts and components are fastened together in the form of shelving units to make the pallet racks. There are many types of pallet racks namely drive-in racks, push-back racks, cantilever racks and carton flow racks.Drive-in pallet racks are made for a fork lift or similar vehicle to drive through. The drive-in racks are built strong enough to wi
Ratio Fixed Costs to Variable Costs (over a reasonable period, say 3, 6 or 12 months). This is your OVERHEAD FACTOR. If the ratio is .25 for example, it simply means you need $0.25 (25 cents) to absorb overhead for every dollar spent on direct costs.
Now, let’s go back to the example above and assume their OHF to be .25 (25%). Further let’s say they are looking for a 15% NET Profit on sales (to match their budget). The price then is:
Direct Costs - Materials: $4,000
Direct Costs – Labor: $5,000 (250x$20/Hour)
Total Direct $9,000
Overhead Absorption: $2,250 (.25 x $9,000)
Total Costs: $11,250 ($9,000 + $2,250)
Profit $1,985 (estimated)
Price to Make 15%: $13,235 ($11,250 + $1,985)
Profitability Check: Profit%=Profit/Sales=$1,985/$13,235 = 15% √
But they actually sold the job for $12,000, so their real net profit at the bottom line was = ($12,000-$11,250)/$12,000 = $750/$12,000 = 6%.
But, You Say, I Can’t Price That Way, the Market Won’t Bear It!
Nevertheless, this is the way to relate pricing to bottom line profit, either actual or proposed. If you can’t achieve the price that results in a reasonable (and budgeted) profit, then you, as owner/CEO/President MUST: lower the cost of your products by better purchasing or more efficient manufacturing, lower your overhead, change the markets in which you participate or change the offer (more value).
Just like ignorance of the law is no defense, neither is lack of knowledge on how to price for profit an excuse to accept low profitability.
The arithmetic above only tells you WHAT you have to do, not HOW. The how is left to your business and marketing plans.
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