Subject: Understanding the Pricing Formula
Date: Sun, 23 Jun 2002 19:52:26 -0400
From: Mark O
>If we use the formula that has been suggested by QBN then the actual
>selling price of this item would be $40.00. Now if we just take 50% of
>the
>$20.00 which is $10.00 and add that to the $20.00 the selling price is
>now
>$30.00.
>Can someone explain to us why we get two very different selling prices?
Hi Barry
The question that you are struggling with is due to approaching the price
from the wrong direction. What you are trying to fiqure out is the
selling price, not what you spent on making it. So you need to start with
the idea that the selling price is 100%. This 100% is made up of two
components, the first is your manufacturing expense and the other is your
overhead expense. If your overhead expense (profit, taxes, non-billable
time, etc.) is 50% of your sales than the amount that is direct
manufacture expense must also be 50% (100 - 50 = 50). In other words one
expense plus the other needs to equal sales price.
In your example, 20 seashells plus ? equals sales price or more correctley
20 seashells is 50% of what price. 20 seashells divided by 50% equals ?
(40 seashells). If an item costs 15 seashells to make and you need 50%
than 15 / 50% = 30 seashells selling price. If it costs 22.70 to make than
22.70 / 50% = 45.40 seashells. The important issue is not to get
confused, if you have 55% overhead than your manufacturing needs to be 45%
and you would divide by 45% to get the selling price. (this is because you
have no idea what the actual mark-up is, all you really know is the cost
to produce and the percentage that you need to obtain.
I hope this makes a small amount of sense, and you can pick up the
concept. I made the post as short as possible for a challenging question.
Mark O'Neill
Finely Crafted Events
Olga, Wa.