As an Industrial Engineer/Supply Chain professional who has run a few manufacturing operations, I thought I would go through some of the basics on how to determine the price for an item you may be manufacturing. I’ve already covered how to estimate the size of a production run on your product (EOQ), so we’ll assume you have done the math. I’ve also covered the fixed costs for an operation, which you will need in order to determine the sort of gross margin you’ll need to charge in order to meet your profitability goals.
The simple equation is basically Price = Cost of raw materials + Cost of Labor to build + Gross Margin
I’ll use a recent cutting board project I made as an example.
With that, the first thing you need to do is to determine what you want to try to price, and create a bill-of-materials (the items which go into your product) for that item. With this you will be able to determine the cost of your raw materials. In this example, I used a simple piece of maple (a good item for a cutting board) and used a can of finish for cutting boards and bowls. I didn’t put in any additional money for sandpaper, brushes, etc.
The next step is to try and determine the steps and labor necessary to build the item. When I did my EOQ analysis, it came out to be about 4 per run, so that was the plan. I determined the steps, and as I built the 4 boards, I timed how long it would take. When I totaled it, I added a 15% PF&D (Personal time, fatigue and delay) factor to the time for breaks, delays, etc. This is fairly common in the manufacturing industry. The result was:
|Simple Cutting Board||Lot Size||4|
|1||Get Wood Down from Storage||58.2||1,617|
|2||Crosscut four (4) pieces with handsaw to rough size||120.0||3,336|
|3||Joint edges on 4 pieces||122.0||3,392|
|4||Plane 4/4 wood down to 3/4″ thickness (four pieces)||911.0||25,326|
|5||Rip & Crosscut to final dimensions||706.0||19,627|
|6||Setup Router Table||825.0||22,935|
|7||Rout roundovers on both sides of Four (4) cutting boards||325.0||9,035|
|8||Setup Drill Press for hole||180.0||5,004|
|9||Cut hanging holes of four (4) cutting boards||184.0||5,115|
|10||Setup small router to roundover hanging holes (4)||241.0||6,700|
|11||Cut roundover on hanging holes (4)||136.0||3,781|
|12||Sand cutting boards to 400 grit (100/180/220/320/400)||2,169.0||60,298|
|14||Clean off boards with mineral spirits or denatured alchool||120.0||3,336|
|13||Apply 1st coat of finish to four(4) cutting boards||534.0||14,845|
|14||Apply 2nd coat of finish to four (4) cutting boards after 8-12 hours||534.0||14,845|
|15||Sand with 400 grit – four (4) cutting boards after 8-12 hours||433.8||12,060|
|17||Clean off boards with mineral spirits or denatured alchool||120.0||3,336|
|16||Apply 3rd coat of finish to four (4) cutting boards after 8-12 hours||534.0||14,845|
|Standard Fatigue Allowance:||15.5%|
|Seconds Per Unit:||2385.0|
|Avg Units Per Hour:||1.5|
A “TMU” is an engineer’s term – it is a “Time Measurement Unit” and 27.8 TMUs = 1 second. So it took me roughly 2 hours and 40 minutes total to build 4 of them, or 0.667 hours/40 minutes to build one. At $15/hour (what I’m paying myself) this works out to $10 for labor.
Finally, I looked at my gross margin, what I’m using to help pay for all the fixed expenses. I’m using a 40% margin goal, which is about middle of the road for manufacturing. This is going to be used to cover my liability insurance, website, machinery purchases, etc.
So the equation looks something like (12.50 + $10) * 140% = $31.50
Based on this analysis, I could sell this item for around $31.50. In looking at Etsy, however, I’m seeing similar product selling for $50-$60. I’ll have to research to see how much of a “cut” Etsy takes, and if shipping is part of the price.
I hope this was useful.
Mr. 39 Months.