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Thread: For those that produce goods for a living a little puzzle to get you going....

  1. #1
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    For those that produce goods for a living a little puzzle to get you going....

    For those in business here is a question how would you deal with it.




    Facts
    • Your business produces an item say "widget".
    • The widget direct cost of material, direct labor, packaging and shipping is say $50 total.
    • You consistently seel just on around 100 "widgets" per month to your current customer base.
    • You sell your widgets for $100 per unit.
    • Your overhead costs or burden is $4000 per month. ( rent,electricity, insurance, telephones, advertising etc).
    • There are no customer discounts, rebates etc just to take it out of the equation.
    • Your profit before tax is therefore $1000.
    Now mr out of the blue new customer wants to buy 20 units per month, but is only willing to pay $70 per unit.

    What would your answer to Mr out of the blue be and why? Do you take the order? and if so why?

    What factors/issues would you take into account to justify your action either way?

    Now change the "widget" from an item to a project such as a "full kitchen cabinet and install" what would you consider to have changed.

    For those that are accountants i would ask you refrain from answering, my intention here is to get some debate going amongst the non accounting business pros out there. There are other aspects left out to make this simplified.

    This is a point i come across all too often and thought i would share it and see the different views.

    Have fun


    Oh for the lumber jacks this could also be wood as opposed to a widget.
    Last edited by Rob Keeble; 09-29-2010 at 03:18 PM.
    cheers

  2. #2
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    If he wants for a one time order, no.
    If he will sign a long term contract, e.g. 12 months. Yes.
    Your overhead remains the same and there is still a $30.00 net profit.
    Confidentiality would also be required. If he might resell in competition with the regular customer base, again, no.
    One must keep customers happy.
    "Folks is funny critters."

    Think for yourselves and let others enjoy the privilege to do so, too. ~Voltaire

  3. #3
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    Interesting response Frank. Lets see what others say?
    cheers

  4. #4
    1000 Wigits at $100 = $100,000 per month

    100,000 - 4000 overhead = $96,000 The cost is 50,000 leaves 46,000--- ProfIt. Per month

    So no to to the $70.00 per unit...

    Wish I could make that kind of money!
    Last edited by Paul Gallian; 09-29-2010 at 02:51 PM.
    Remember the tea kettle - it is always up to its neck in hot water, yet it
    still sings!

  5. #5
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    Quote Originally Posted by Paul Gallian View Post
    1000 Wigits at $100 = $100,000 per month

    100,000 - 4000 overhead = $96,000 The cost is 50,000 leaves 46,000--- ProfIt. Per month

    So no to to the $70.00 per unit...

    Wish I could make that kind of money!
    True, but if overhead is still $4,000, you're passing up $4,000 profit (minus the $10,000 production cost).

    I think when applied to kitchens and installation, you probably would get into all the various upgrades available and additional labor costs (and all that goes along with having employees).
    Darren

    To a small child, the perfect granddad is unafraid of big dogs and fierce storms but absolutely terrified of the word “boo.” – Robert Brault

  6. #6
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    When I was shoeing horses, if I could pull into a barn and trim horses all day, I would cut the price from $5.00 per horse to $4.00 per horse. Less cost as I was in the same place and generally staying in one barn longer would result in more work as more owners see and hear about you. Shoeing, still cut a buck, but always figured that was cheaper than shoeing/trimming one then driving to another barn.

    Pens, I have cut deals. Not worried about confidentiality, if they provided me a profit and I had a contract for a specific quantity for a specific time, 50% of the money up front, other paid on delivery.
    Jon

    God and family, the rest is icing on the cake. I'm so far behind, I think I'm in first place!

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  7. #7
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    Profit is more than the money left over after the costs are paid. It is also the return on investment in bringing the wigit to the market in the first place. And it is the well to draw upon to bring new wigits to the market, or in the face of current wigits in the market declining and giving way to a new wigit line.

    So unless the existing wigit can be made for 30% less and offered to that customer at his price for that model wigit, then no.

    Not only would profit be lost, but also the wigit business would be hamstrung in bringing new products to the market, thus jeopardizing the survival of the business.

    Now if the wigit business is already in trouble and NEEDS to sell the $70 wigit at this point in time, then perhaps but with a longer term view of the wigit business and where it is going.

    Complicated question, Rob. But basically I see the request as an attempt to destroy the business by a competitor. You did not say why the customer wanted then for 30% less, but that is quite a hit. For 10% is another story, but 30%? Yikes! Not a friendly move in the marketplace at all!

    My 2 cents, but then you asked.

  8. #8
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    Quote Originally Posted by Paul Gallian View Post
    1000 Wigits at $100 = $100,000 per month

    100,000 - 4000 overhead = $96,000 The cost is 50,000 leaves 46,000--- ProfIt. Per month

    So no to to the $70.00 per unit...

    Wish I could make that kind of money!

    Ooops Paul you dead right typo erros on my part. I will fix. so it all works out.
    Last edited by Rob Keeble; 09-29-2010 at 03:20 PM.
    cheers

  9. #9
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    I like your thinking Carol and we will evolve the parameters as we go on.

    Great input lets see some more. Get the old grey matter working.

    Sorry for the typos throwing anyone off.

    Paul have another go.
    cheers

  10. #10
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    Quote Originally Posted by Frank Fusco View Post
    Confidentiality would also be required.
    I think this is an important point.
    Consider this along with Carol's comments.

    30% is a huge discount.
    And I seriously doubt that confidentiality is possible. It's too easy for the word to get out.

    This can engender ill-will in your current customers, as well as basically force you to cut the price on all the widgets you produce.

    tough situation, Rob.
    There's usually more than one way to do it...
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