search  current discussion  categories  business - pricing

## pricing my turn (page 6)

### Terrance Lazaroff on sun 2 feb 97

My does a week go by quickly. I will keep this page short as I am stepping
out this evening.

We will continue our discussion on variable costs by working out our
production capability.

In our last post we discussed our unit production capability (the time it
takes to make one mug). For our discussion we determined that we were
capable of producing five, ready to sell mugs per hour. Finding a projected
production capability for the year can follow. Before we begin this
exercise we again have to make some very critical decisions. We must ask
ourselves if we want to work weekends and national holidays. We must ask
ourselves if we wish to take two weeks vacation with our families each year.
We must ask ourselves if we wish to take a one hour lunch break and two 15
minute coffee breaks. There will be the decision as to how many days a year
we will dedicate to R&D, as well as the number of days we wish to spend
standing around our work at salons. Once we determine this information we
can begin the task of projecting our production capability. Let us, for the
sake of argument, decide that we will work 365 days less 104 days called
weekends, 11 national holidays, 10 working days for vacation, 10 days for R&D
and 25 days for salons. Our daily working schedule will be 8 hours less 30
minutes for lunch, 30 minutes for coffee breaks.

You may remember when we were recording our production data we did not talk
about setup time, and cleanup time. Well we can account for this time now.
If we do we will take 30 minutes per day for setup and cleanup.

Now we can estimate our maximum production capability for ready to sell mugs
at 6.5 hours per day times 5 mugs. We end up with 32.5 mugs per day. Using
the daily production figure and multiplying by the maximum production days
that we have dedicated in one year we arrive at (365-(104+11+10+10+25+)) X
32.5 = approximately 6662 mugs per year. Remember these are theoretical
figures. We have no intention of making this many mugs. At least I don't.
These figures are necessary in order to solve the problem. Also remember
that our production capability will improve with practice. So we should do
an analysis frequently to monitor our ability.

In closing we now have the following data:

Fixed cost = \$38,350.00
Material costs for clay = \$0.45
Cost to Transport clay = \$0.09
Production capability = 6662

The next posting we will determine our firing and glazing costs. We will
then carry out the final tally. Then we get to the real fun. We will talk
about profit and other good things.

Until then

Terrance F. Lazaroff