Terrance Lazaroff on thu 16 jan 97
Well I am back. If you recall, during the last post(Pricing my turn, page
3), we were discussing the FIXED COSTS. I was also a bit concerned that the
table wouldn't come through as I had envisioned it. I was right. The
formatting will be a bit difficult.
Nevertheless, I mentioned that the FIXED COSTS would be easy to find. I
presented some fictitious figures and as a result I received a few e-mails
that questioned my rational.
In response, I would like to talk about this list as it is very important.
In fact, it is the most expensive part of the costing model that we are
Rent: Some people say they work out of their home and don't have to pay
rent. They feel that they are more competitive because they do not have to
include rent in their costs. Others put the rent into their costing model
because they know that although the selling price will rise, the increase
will be pure profit. Whatever you decide, remember that in reality, you are
paying for your home studio by giving up space that could be put to other
use. You may be giving up living standards such as a possible rec room, if
you are using the basement of your house. It could mean giving up storage
space, if you are using a garage. For those of us in Canada , it could also
mean loosing some hard cash, if you don't declare the home space, used for a
business, on your tax return. I am in a Co-op. This is a great way to save
on rent. It also helps reduce the cost of equipment.
Insurance: Purchasing insurance is a personal decision. If you have buyers
coming into your pottery there is always the chance they could fall or injure
themselves. If you have a gas kiln then there is the possibility of a fire.
If you are in a large industrial complex, the fire could affect other
businesses. The amount shown here is not realistic, if you are paying the
total bill yourself. However, if you are a member of a cooperative you
could see a similar figure. A more realistic figure, if you are working
alone, could be $500.00. Even if you are working out of your house, you
may have to inform your insurance company that you have a home business.
They may increase your rates.
Equipment, Maintenance and Parts; I have put $1200.00 a year against
this item because I believe that to have an effective pottery you require a
good wheel, and a good kiln. These two items along with other startup costs
could require you services a 5000.00 debt of which would cost 1200.00 just
for principle payments.
Interest Costs: This is the amount of money required to pay the interest on
the above debt.
Conventions/Workshops: I used last years figures that I spent to go to
NCECA in Rochester, NY. I am sure this would be much higher this year as
there will be airfare.
Motor Vehicle Expenses: This figure may be a bit conservative. I have
read somewhere that it cost approximately $8000.00 a year to operate a car.
Salaries and Benefits: I discussed this last in the last post. but I feel
that it is very important to understand the need to pay yourself a decent
wage. This figure will also include your wages for non productive time, (the
time you are away from your wheel doing other necessary things, such as
working at shows, packaging, shipping, administering, repairing and
cleaning), to mention a few.
It is easy to see that fixed costs will form the largest part of our model
when we look at the bottom line We could say that the first mug we make will
give a fixed cost $38,350.00 plus the variable costs. If we make two mugs,
the fixed costs would be $19,175.00: 4 mugs would have fixed costs of
$9587.00 each , and so on, until we produce 8192 mugs at a fixed cost of
$4.68 each. My god, can we produce and sell this many mugs? That is the
answer we will find when we look at collecting data for the VARIABLE COSTS.
When we talk about VARIABLE COSTS we are discussing: material, energy, and
production capability. You may be wondering, at this time, how will you be
able to take the time to analyze all this data when you are struggling just
to make income. I agree that analyzing data is time consuming and the
calculations can be quite tedious, but it is something that has to be done,
even is it is in your head while you make your pots. Some consolation can
come from the fact that once you figure out your fixed costs, they will
remain constant, with only a few minor adjustments, each year. The same can
be said for VARIABLE COSTS. For example, once you calculate the volume of
space required in your kiln to fire 25 mugs, the figure should remain
constant until you change your kiln size.
VARIABLE COSTS depend upon your production capability. For example if you
require 14 ounces of clay per mug, you will be able to determine the number
of mugs per 44 pound box of clay by using the following calculation; (44 X
16)/14 to equal 50 mugs. Allowing the cost of $20.00 CDN per box of clay,
the cost of clay per mug would be approximately $0.40 Using 13 ounces of
clay per mug will save the potter approximately $0.03 a mug.
I will sign off now as I don't want this posting to get to long. In the next
posting I will talk about firing costs and glaze expenses.
I was thinking about putting topic on the Ceramic Web Page. That way we
will not be taking up valuable time of those who are on other interests.
Feed back appreciated.
Terrance F. Lazaroff
St Hubert, Quebec, Canada !!!!
Robert S. Bruch on fri 17 jan 97
I am not sure that I would include a 'wage' in my
calculations. What is important is the figure for
net profits from the business on an annual basis.
If the purpose of the calculation is to determine if
one should continue in the business vs taking up
another occupation, then wages would not be included.
Benefits, such as pensions (IRAs) and medical insurance
would be included.
If someone is trying to price a line of work, then you
need to approximate the number of units that you plan
to make ( and think you can sell ). I would then
determine a net profit for the year that I felt I
needed to justify staying in business - at that level -
and add that figure to my cost analysis.
These costs might not be fixed, but rather be variable
costs. For instance, if that analysis would force you
to price your products too high, you might have to
decide to accept a lower net profit/income or decide
to make ceramics on less than a full time basis and
take a part time job in order to get your prices in
line with a realistic selling point.
Bob Bruch email@example.com