Costs and Determination of Prices

In order to calculate the price of the sale of a product first it is important to know how much it costs to produce it. For this factor you will need to consider the expenses made to establish the productive unit, as well as the monthly costs from the own production itself.

Obviously the prices that we are proposing are referential: if you want to begin with a productive unit, you will need to make these same calculations with the real prices of the place you live in.

The investment costs are the costs that must be done before starting out a company. They are divided in:

General preoperative expenses: (establishment of the company, registration, licenses, capacitating, tests, previous studies, etc). 

Active expenses: (Machinery, materials and tools).

The preoperative expenses vary depending on the case. In this example we are considering $50,00 for the expenses of licenses, registration, market studies etc.

Now we see what could be the initial investment in machines and tools (active spending) for the elaboration of vinegar. Remember that these prices are only referential and they vary in each place.

Production costs
These are expenses that are done every month. The variable costs depend on the volume of monthly production (workers, materials and ingredients) and the fixed prices (rent, electricity etc.), which are similar every month.

Variable costs

Manual labor costs
The amount of workers can vary depending on the production volume foreseen in the month.

Monthly costs of prime materials and products

The cost of this also varies depending on the production:
Calculate the amount of prime materials needed for fifty liters of vinegar.

Calculate the total costs.

Let’s say that you will need three workers that will have a cost of $120,00 each. In other words, $360,00 in manual labor costs.

Then multiply your other costs by 7. This way you will be able to calculate the necessary amounts to produce 350 liters.

Then multiply the unitary cost of each product by the quantities obtained.

Don’t forget to get the real costs in your location before making calculations.

Fixed costs

Depreciation costs
The equipment you will be using will go losing value with time, this is why it will be necessary to separate an amount of money to be able to replace them when they break down or deteriorate.

These costs are calculated by dividing the price of each active between its life span and dividing the result between 12.

This means that you will need to separate a certain amount every month to be able to repair the equipment and deteriorated materials.

 

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