This week we are going to cover calculating gross profit for companies that manufacture products.
- As with the service industries, companies that produce tangible items must know what price the market will bear for their products. Determining a sales price can be any method, from an in depth market study, to a simple exercise in shopping your competitors.
- Next you will need to know how many of your products you will be able to sell in each the next twelve months. Again what the market will bear.
- Step three is determining how much it costs to produce the products you sell. This will include materials, full burden (taxes and benefits) labor, depreciation of equipment, supplies, full burden support labor…. This list can be much longer depending on your industry. You can find industry information at a site like Prime Industry Reports.
- If your company is in resale, your cost of goods sold is the price you can obtain inventory plus and carrying costs. Carrying costs can be interest to finance the inventory to the warehouse to hold the inventory and freight to transport the products to the warehouse.
- To determine revenue take the number of units you will be able to sell each month times the market price you have determined.
- For the cost of goods sold the calculation is the number of units sold each month times the cost to product one unit.
- Now subtract the monthly cost of goods sold from the monthly revenue to obtain the gross profit.
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