Wednesday, May 19, 2010

Cost Analysis

Since we are all on this adventure together there is an opportunity to discuss some of the cost issues that are always present when designing or preparing a product to be manufactured.

Companies and accountants nearly always use a method known as COGS, which stands for Cost of Goods Sold.  There are variations on this but basically it usually consists of these three main categories:

1. Materials cost at the point of manufacture. This would include film, cut paper, sleeves, borders, clips, reagent pods and also the package it comes in.

2. Assembly costs.  This is often expressed in hours or portions of hours it takes to put it all together times some standard rate, such as the "shop rate". All this means is how much an hour of assembly time costs in the facility, including salaries, fringe benefits, insurance, overhead such as lighting and rent, spread out over time. Many companies simply refer to this category as "labor".

3. Selling, General and Administrative Costs.  SG&A sometimes is not included in the analysis, but in this case we have to because there is nobody else to do all the ordering, hiring, design debugging, customer service, packing and shipping, and product maintenance.

More to follow, with details of COGS for New55, and about Gross Margin. These basics apply to everything you buy, and as an informed consumer, you should be aware of them.

Most consumers do not understand the profit margins made on products, especially consumer products, and most especially disposable or single-use consumer items.  All of this is helpful to understanding why, for instance, Ilford declined to manufacture the instant sheet films when they were offered, and knowing the details also permits us to work with the numbers, and technology, to improve and possibly lower the costs - if we are clever enough. In the end, though, the key number is what the consumer will pay.

A very rough estimate:

1% of the potential users of 55 would pay $30 a sheet, meaning we would sell about 50 sheets a year
10% of the potential users of 55 would pay $20 a sheet, and we would sell about 500 sheets a year
40% of the potential users of 55 would pay $10 a sheet, making 5000 sheets a year (is that enough to make it worthwhile? I wonder)
60% would pay $5 a sheet and maybe we can sell 20,000 sheets a year or so and possibly break even.
99% would pay $1 a sheet, but we would still only sell maybe 40,000 sheets a year and go broke.

It is such a small market that it would take years to recoup a large investment in tooling and machinery, which is not included in COGS, but someone still has to make the investment. COGS needs to be no more than about 25-40% of the final retail price to achieve breakeven.  That means that if we charge $5 a sheet, the total manufacturing cost for that sheet cannot be more than about $1.50 or so. You may be aware that one piece of B&W 4x5 sheet film costs about a dollar at retail.

Look closely and you will see a clip made from a Fresca can. The film is a piece of TMX, and the pod is from 100 series packfilm.  The blotches are experiments done with small amounts of reagents at various pH levels on a fully exposed sheet.

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