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Design Product Selling Price

Essay by   •  May 16, 2011  •  Case Study  •  923 Words (4 Pages)  •  1,332 Views

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For a product which just entries the market, in order to get the highest benefits, the cost pricing and selling pricing analysis are essential. At the same time, the quality and function satisfaction could not be missed either.

4.1 Design Product Selling Price

According to the cost-plus pricing method written by professor Lemass (2011), the total selling price is containing the profit price per unit and total cost of product per unit. Product cost contains prime cost and expense. Specifically, Prime cost is the sum of direct labour and direct labour costs, then expense includes manufacturing expenses, marketing expenses, and general expenses (see table below).

Profit

(before tax) Selling

Price

General

expenses Total

cost

of

product

Marketing

expenses Cost of

Product

Manufacturing

& marketing

Manufacturing

Expenses Cost of

Product

manufacturing

Direct

labour Prime Cost

Direct

material

Table 4.1 cost-plus pricing for a manufactured product

4.1.1 Prime cost

In order to calculate the prime cost, some factors should be assumed. Firstly, workers are considered to work six hours per day. Secondly, one machine which is operated by 3 workers is supposed to produce 6 products an hour and hourly operating machines are assumed to be 5. Also, to minimize the labour cost, we choose china as our producing country where may have the lowest manufacturing labour cost around the world

Firstly, from manufacturing workers' salary (2008), and Official public holiday (2010), we can get the average of Chinese worker hourly cost is $1.36 per hour in suburban area and workers get 11 days leave per year. To calculate direct labour, the equations are shown below:

direct labour

Wages: 6 hrs×5 days×52 weeks×$ 1.36×3×5=$ 31,824/year

Leave loading: 4 weeks at 15%

4 wks×5 days×6hrs×$ 1.36×5×3×15%=$367.2/year

Payment tax: According to World Tax website (2011), worker who gets 1770 RMB per month has a 10% payment tax

10%×($31,824+$367.2)=$3,219.12/year

Pension funding: Farid and Cozzarin presented that Chinese worker has a pension fund in 13% of the pretax salary (2008, p182).

13%×($31824+$367.2)=$4,184.86/year

Total= $ 39,595.18/year

Hours/year: 52×5×6=1,560 hrs

Annual leave: 25×6=150 hrs

Sick leave: 2×5×6=60 hrs

Public holiday:13×6=78 hrs

Long leave: 6×6=36 hrs

Total hours = 1,236 hrs/year

Cost per product= $39,595.18÷(1,236×6×5)=$1.07 /product

Secondly, to get the direct material cost, our product cost can be estimated by 3 parts. The knifes are locked in wood core which is surrounded by a stainless steel. First is the stainless steel frame, which has about 0.1 cm thickness. Second is the wood core, which is considered as a cuboid in 40cm×25cm×12cm size. Third part is 4 long knifes in 20cm×4cm×0.4cm size, as table below is showing.

Part Size Volume

Stainless frame 40cm×25cm×12cm 3.56×10-4 m3

Wood core 40cm×25cm×12cm 1.2×10-2 m3

Knifes (4) 20cm×4cm×0.4cm 3.2×10-5 m3

Table 4.2 units of knife container

According to the newest price list shown below on Meps website (2011), the price in January 2011 is taken to get the raw material cost. Because of the shape of container, the cold rolled coil stainless steel which has a better ability to be transformed is considered. Moreover, in order to minimize capital cost, we choose the cheapest model, which is 304 pricing at $ 3635 /ton. This stainless steel is also to produce knifes.

Month Hot Rolled Coil (304) Hot Rolled Coil (316) Hot Rolled Plate (304) Hot Rolled Plate (316) Cold Rolled Coil (304) Cold Rolled Coil (316) Cold Rolled Coil (430) Drawn Bar (304) Drawn Bar (316)

Jul-2010 3191 4674 3983 5550 3393 4914 2095 3723 5300

Aug-2010 3163 4588 3973 5482 3377 4840 2131 3686 5202

Sep-2010 3156 4588 3959 5467 3371 4847 2082 3702 5194

Oct-2010 3383 4918 4195 5791 3584 5149 2122 4012 5663

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