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## pricing (my turn page 10)

### ZALT@aol.com on tue 1 apr 97

So lets get to the numbers.

FIXED COSTS

Someone posted a cost for a mixing/pugging machine at approximately \$4000.00.
US\$. Some of us may have the amount of money to purchase the machine with
cash, but let us include the cost of a loan, amortized over two years, for
those, who have to go to the bank. We should also include transportation
costs, as the average potter lives a good distance from a supplier. So here
is what our fixed costs will look like.

Clay mixer/pugger - \$4,000.00
Cost of Loan/2yrs - \$ 400.00
Transportation - \$ 125.00

Total - \$4525.00

VARIABLE COSTS

I then costed a good stoneware recipe that was used at school. The school
stoneware recipe costed out to be approximately \$0.19 US per lb. of clay mix
,dry . It is important to convert our figures to either dry or wet weight.
I elected to use the wet weight in our discussion . Thus if I have 100 lbs
of dry clay at \$0.19 per pound the total cost will be \$19.00. Conversion to
wet clay, demands that we add up to 30% water or 30 lbs. Doing this, we
arrive at aproximately 130 pounds of wet clay that cost \$19.00. This in turn
means that we have paid \$19.00/130 lbs = \$0.15 per lb. for wet clay.

We will hire a student from time to time to make our clay and let us say that
we will pay an hourly wage of \$5.00 US. Let us set our production capability
at 300 lbs. of WET clay in two hours.. In order to achieve 300 lb. of WET
clay we will be using approximately 230 lbs. of clay mix, dry.

We can now determine the variable costs of processing one pound of dry clay.
My personal recipe costs (dry) = \$0.19
Labor costs per pound = \$0.04 ---- \$10.00/230 pounds of dry clay

Total cost of clay mix (dry) = \$.23 per lb.
Conversion to wet clay = \$0.18 per lb.

I selected popular stoneware clay, sold in my area, to use as the example
for the cost of commercial clay . This figure will represent our break-even
cost. One box weighing 44 pounds of wet clay costs approximately 12 \$US or
\$0.27 per pound (wet).

We can now insert the numbers into our break-even formula (\$4525/X) +\$0.18 =
\$0.27 Where X = the quantity of clay that must be used to bring us to a
cost similar to purchasing commercial clay at \$0.27 cents per pound (wet),
when we can make a similar clay for \$0.18 per lb (wet). Whoa!!! Does this
sound confusing? Well look at it this way. If we only make one pound of
clay the formula will look like (\$4525/1)+\$0.18 = \$0.27 to equal a cost of
\$4524.91 for that one pound. If we made only two pounds of clay, the
formula will look like (\$4525/2)+\$0.18 = \$2262.41 per pound, and so on. The
results of our initial formula tell us that we must make and use 50,277 lbs
of our wet clay to arrive at the cost of commercial wet clay. What I am
saying is that if we were to make clay and sell it to anyone at \$0.27 per
lb., wet, we would have to sell approximately 23 tons of clay just to
break-even.

Every pound of clay made after we reach this amount will be considered less
expensive than commercial clay. Now, Let us say, for the sake of argument,
that we want to immediatly save at least \$0.05 per pound on our clay costs.
This means we will have to adjust our break-even figure to read \$0.22 vice
\$0.27 per pound. In order for our clay making subsiduary to break-even, we
will have to sell according to the following formula, (4525/X)+\$0.18 =
\$0.22 . This means that we would have to sell 113,125 pounds or
appriximately 51 tons of wet clay inorder to break-even.

The calculation will look like the following:

(\$4525/X)+\$0.18 = \$0.22
= (\$4525/X) = \$0.22 - \$0.18
= (\$4525/X) = \$0.04
= \$4525/\$0.04 = X
= 113,125 = X

When we look at the figures we can see that by using 3 tons of clay a year,
we will require more than 8 years to break even and 17 years to save \$0.05
cents on the pound. Using 6 tons of clay a year will give us a break-even
point at 3.8 yrs. and 8 to 9 years to realize a \$0.05 a pound less, selling
price. Finaly looking at using 9 Tons of clay a year, we will required 2 to
3 years for our break-even and 5 to 6 years to realize \$0.05 per pound less,
selling price.

What if we do not want to use comercial clay, or do not wish to purchase a
mixing machine and we feel that our personal recipe is better? Perhapes we
should look at purchasing a custom mix? I called a reliable clay supplier
and gave them the same recipe that we used, for our discussion. The cost
estimate was a real suprise to me. It came to approximatly \$0.23 per pound.
Working these figures into our analysis we arrive close to the same results
as when we + roll our own ;. I can only assume that the reason for the
difference is that most comercial mixes are balance to allow a greator range
of usage. Many mixes are constructed to allow for hand building, throwing ,
extruding and other clay manipulations without altering the clay, whereas a
custom mix may be applicable to wheel work, only. We have to also remember
that we would be required to purchase in a large quantity to benifit from
this low figure.

Now, let us look at the some other spin-off values, associated with
purchasing a clay mixing/pugging machine. Lets say we are making the famous
mug that was discussed in my (Pricing my turn pages 1...8). If you recall we
pegged the Fixed costs for the operation including my salary at \$38,350.00.
Remember this was in Canadian Dollars but the principle will be the same.
Lets for the discussion look at figure as a productive hourly cost. We
would divide \$38,350.00 by the productive time determined to be 204 days *
6.5 hours of pure production time. We arrive at a figure equaling \$28.92
per hour of activity. Now if we look at the time it takes us to weigh and
wedge our balls of clay in order to make our mugs, we see that we are
spending close to a minute to wedge each ball of clay. In order to make the
6662 mugs a year and we can see that we are going to spend 111 productive
hours or 8% of our productive year wedging clay. We know that even with a
pugger we will be required to wedge. What if we could cut the wedging time
in half? We could then say that we have economized on 55 productive hours
which we could also say equals to increase production capability of an
additional 220 mugs a year. Instead of wedging we can make more mugs thus
increasing our production capability. This in turn will decrease the cost to
us when making a mug and decrease the break-even point to \$6.38 from \$6.56 or
\$0.18 per mug. We can pass the savings on to the customer or keep the
profit for ourselves. You decide. Converting the productive hours to
monitory value we arrive at \$1238 per year which is close to 25% of the value
of the machine.

Those of us who pot and pay taxes in Canada, can also use the machine for
submitting a " Capital Cost Allowance Claim ", on our business income tax
which will allow a 20% business tax deduction on 50% of the value of the
machinery during the first year and a 20% per year on the depreciated amount
each year there after. The first year yields an exemption of \$400.00 CDN.
The second will yield \$720.00 and \$576.00 for the third year. It takes
approximately 10 years to depreciate the item. I don't know if the American
tax system has the same advantages. If it does great.

We could also look at renting our clay mixer/pugger to other area potters.
When we look at the amount of clay that we need, we will undoubtedly find
that our machine is sitting idle except when we are mixing clay or when we
are preparing our mugs. We could advertise to our clay colleges, that we are
willing to rent the machine for, lets say \$50 dollars a day or \$150 a week
If you can find 5 customers who would like to use your machine three weeks
a a year you could realize a yearly revenue of up to \$2250.00. If you do
rent your machine be prepared to pay clean up time.

So, there we have it. A clay making machine/pugger will take 3 years with
an 8 ton clay requirement , per year, to break even. More years if we want
to pay less. That is providing we use the machine, only, for making clay.
If we use it for pugging our clay as well, we will economize our time.
This in turn should allow us to be more productive. The amount saved here
could help pay the machine down faster. For the Canadians there could be a
tax break that will allow us to deduct the machine from our gross profit
when we calculate our business taxes. Lastly we could use the machine/pugger
for rental income which will allow us to pay down the machine faster and
thus realize our goal for cheaper clay. The final option is to find a
reliable supplier, purchase custom clay and forget about saving pennies and
leave the hard work to the experts.

*****Appreciation to Bob Kavanagh for his assistance in putting togther this
posting,

*****Any new readers who want a copy of pages 1 through 8 send me an e-mail
at Zalt@aol.com

Terrance Frank Lazaroff