An Academic question

[Timmetie]

As you might know, i'm studying to become a corporate engineer (I don't know what that is either).

And me, and some fellow idiots, are having a discussion which pits me against all of them. It's about the cost price of products.
They claim constant costs (say housing, phone bills, etc) should be added to the cost price, that would be constant costs/product quantity.

I then, after insulting their heritage, replied by saying that the cost price of a product is nothing more than the cost to produce 1 of them. After that a company sets the margin (preferably somewhere around 300%) and then you calculate how many you'd need to break even and if possibly adjust the margin accordingly.

I mean, their method would mean the cost price changing with every product you sell. Say you think you're going to sell 100 stuff, and you end up selling 110, would you lower the price? I mean, its kinda odd and you're going to end up way above market price if you're not carefull.

anyone have any thoughts?

[Timmetie]

Well, i've already convinced myself of my wrongness. I'm stoopid.

No I'm not!

Yes i am, i can't even spell it.

spell what?

stoopid.

Ah yea, i've got a point there.

[Snail]

ok....first of all i dont really get what the real question is here, but i will take a shot at it.

"They claim constant costs (say housing, phone bills, etc) should be added to the cost price, that would be constant costs/product quantity."

first of all.....look at it this way....

a car company sells 10 000 cars in 1 month at 100 000 geos for a car= 1 billion geos
the electricity bill for running the factory/ company for 1 month= 3 million geos
the phone bills to all the suppliers, clients, salaries etc for the month= 100 million geos
the water used by staff etc for the month = 23 million geos
the expenses for the staff (toilet rolls, functions, clothing etc) for 1 month= 19 million geos
the total costs of building the cars for 100 000 cars= 550 million geos

therefore the total costs, expenses= 695 million geos
the total money made by the cars= 1 billion geos
total profits= 305 million geos

"replied by saying that the cost price of a product is nothing more than the cost to produce 1 of them."

if the company made 1 billion geos for selling the cars and the cost of producing the cars was 550 million geos.....then the company would expect to make a clear profit of 450 million geos.

the company could/ would then use this 450 million geos to invest in making their cars safer with new technology.....now after spending the 450 million geos on upgrading technology the company now still has to pay back 145 million geos for all the expenses they have accumulated over that month due to staff etc.

now the company is in debt of 145 million geos to the bank.

you see even though toilet rolls dont help make the car, it still cleans up the staff's sh%t.

i hope that answers some part of this twisted question lol

[techtrenton]

I'm going to take a stab at this and probably regret it.

Yes, constant costs should be determined in the price. Actually, that is where all of the markup is. Take an ordinary screwdriver for example. Say it costs $1.97. All it is is a piece of metal and a piece of plastic. The actual material cost for a screwdriver would probably be 5 cents or less. But you have to have a building to produce the screwdriver in, you have to pay someone to assemble the screwdriver, you have to pay part of their insurance and 401k (here in the US), you have to buy the material, and you have to pay the utilities.

Now, draw that out over a few thousand screwdrivers made and the screwdriver now costs say 97 cents to produce. You as the manufacturer want to make some money off of the screwdrivers, at least 25 cents, so you add 35 cents to the price. Now it is $1.29. This is what can be called the retail price, what you sell it to the stores for. The stores has to pay overhead cost and they want to make a profit also, so they add on 68 cents. Now you have a $1.97 screwdriver.

I see this everyday in my line of work. A certain company buys large amounts of magazines from us and offer their customers 10% off their magazine purchase. An example would be a $1.99 puzzle book only costing the store about 49 cents.

Have to stop here. Time to go eat lunch.

[filibuster]

Perhaps they are just making the difference between production costs and operative costs.
The latter aren't included in the unit cost even if they are constant (sales, administrative, financial, etc.)

(see http://blog.accountingcoach.com/product-cost-period-cost/)

[Snail]

i think all of the above replys answer ur question?

[Timmetie]

Aye, well I know the theory and how it works, i guess it's a matter of semantics now.

Whereas i'm arguing that product cost is the marginal cost, the renewed cost of each and every product, the variable cost.
They are arguing that its the average of the total costs.

So it's a pretty meaningless discussion, especially over a language barrier :D I just thought that such a common word like product cost would not include an assesment of future sales to divide total costs by nor a intricate way to divide common static costs over different product lines.

thanks peeps.

[Blitzkrieg]

I mean, their method would mean the cost price changing with every product you sell. Say you think you're going to sell 100 stuff, and you end up selling 110, would you lower the price? I mean, its kinda odd and you're going to end up way above market price if you're not carefull.

anyone have any thoughts?

So if that bit is right, they are saying the more you sell, the less you sell it for (as you maintain margin. But the true market price of any commodity is basically what someone is prepared to pay for the item. A company's idealic margin is only a pipe-dream. Supply and demand is the true condition.

For mine, a product's cost is the cost of materials and labour to manufacture the product with certain static allowances also for it's share of energy usage also thrown in.

The majority of static allowances are the problem of marketting to sell enough of the product to ensure sustainability of the corporation. And we all love corporations right?

Let me explain to you how this works. You see, the corporations finance NAOW. And then NAOW goes out and the corporations sit there in their, in their corporation buildings and, and and see that's, they're all corporationy, and they make money. Mhm.

[Timmetie]

Aye well, that was my point somewhat minus the rambling.

They guess the demand, by which they establish their price, which in turn changes the demand. It makes no sense! but nearly nothing around here does, although i did ace my logic exam oddly enough.

[filibuster]

Finding the right price is part of the fun.
It includes distributing the costs, but the best part is that companies pay you to do it for them.

[Generic42]

It doesn't matter how great you make the product cost, so long as you can find a market still willing to buy it

[Snail]

It doesn't matter how great you make the product cost, so long as you can find a market still willing to buy it

i second that. if u dont have a market to sell to then why bother producing?