BUSINESS
DANIELLE HENDON Virtual CFO 4 Corners CFO
PRICE TO BE PROFITABLE – The Case of the Button Factory
One of the biggest hurdles entrepreneurs face is undervaluing their product / service or overvaluing the need for an expense . That sounds simple enough but it can get a bit complicated when you peak behind the curtains . Whether you ’ ve been in business for years or haven ’ t even sold your first product / service yet , a good cost price analysis has exponential value .
Hi , my name is Joe . I ’ ve got a wife and three kids and I work in a button factory . One day , my boss says , “ Joe , are you busy ?” I said , “ no ”. “ Then push this button with your right hand ”
I hope I ’ m not the only person that sang that campfire song as a kid …
The Button Factory is going to be the example for this case study . Since Joe is the button pusher , I ’ m going to call our business owner Jane .
Like most business owners , Jane knows the cost of a single plastic button can be calculated by determining how much material ( plastic ) is used and how much that plastic will cost her plus packaging and shipping .
• $ 0.50 for the plastic melted and molded into a set of 3 buttons
• $ 0.10 for the pretty plastic bag they go in
• Shipping is paid for by the customer so no “ cost ” to Jane Jane uses this information to set her price at $ 1.00 for 3 buttons . That gives her a profit of $ 0.40 right ? Wrong … What about Joe ? Selling buttons is the only way the Button Factory makes money . The cost of those buttons is NOT the only
expense the Button Factory has to pay . Joe has to get paid for all that button pushing right ? What about the factory he ’ s standing in and the equipment he ’ s pushing the buttons on ?
• Joe makes $ 12 / hr
• The factory makes approximately 90 buttons an hour
• The factory rent is $ 1,500 a month
• The equipment was $ 30,000 with a 5-year expected life ( the “ cost of use ” aka depreciation is $ 500 a month )
• Jane pays an accountant $ 500 a month to handle the bookkeeping If Jane left her price at the original $ 1 for 3 buttons , she would actually lose $ 2,500 in one month . I won ’ t bore you with the math but I promise it ’ s true for 4 weeks at 40 hours a week .
Jane needs to add up ALL of these costs and determine a realistic price . With a total cost of $ 7,300 in one month and 4,800 sets of buttons , Jane needs to price each set at $ 1.53 to break even . This doesn ’ t even begin to calculate the potential for faulty buttons ( waste ) or unsold product ( inventory ). More importantly , breaking even actually doesn ’ t pay Jane . If you don ’ t include YOUR paycheck in the calculation , you won ’ t have one ! Next time you look at your bank account and wonder where the money went try running this calculation on a few of your products / services . Are you profiting as much as you planned ?
24 MOMENTUM