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

Rob Keeble

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GTA Ontario Canada
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.
 
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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.
 
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!
 
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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).
 
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.
 
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. ;)
 
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.
 
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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.
 
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.
 
It would have to be a contract at 30%. The contract would have to stipulate a certain length, and a percentage of the money to be paid for up front. I would use this money in a method that would help me decrease the overall cost I have - be it per board or to reduce overhead in some manner. Say buy energy efficient lighting or better automation in the production or a large quantity lot purchase of materials. If I couldn't use the money for that purpose, then I probably wouldn't take the order.

For 10%, I'd probably do something similar but wouldn't necessarily hold to those convictions. Basically squirrel away the deposit. But it's been my experience that when dealing with situations of scale, your product cost per unit never stays the same when dealing with additional demand. Your materials cost could go down due to being able to purchase in larger lots, it could go up from you overtaxing your supplier, or it could go up from the increased risk of tool failure - be it planer knives, drill bits, etc.

I based this off of my current project. Now kitchen cabinets? I suppose it depends on your ability to get the increased load done and keep lot cost near the same, and the benefits of getting your product out to a greater audience and hoping to recoup the money through advertising or word of mouth.

But that's just me. I don't produce goods for a living but I could not resist the brain exercise for the day. Hope that's okay.
 
OK. 10%.

If 10 cents on the dollar is going out of my pocket, then what am I buying with it? What about this deal is to my benefit?

Because if nothing is, then why do it?

You'll need another parameter for me to act, Rob.

Still no deal.

BTDT.
 
Okay so we change the parameter to 10% below the current selling price. How would you feel then.

I would still require a minimum contract, confidentiality and assurance it would not be sold in a market competitive with my other customers.

Add another twist. We are back to the potential buyer wanting a 30% discount. But, this time, the customer is Wal-Mart and they want almost a zillion of the things. :eek:
 
Holy cow...what a can of worms!! I'm in health care...the only business in the world that is required to give away stuff for free and still pay it's employee's and keep the lights on. Mr Widget pays the price or he can move on...IMHO:(:eek:
 
They probably will want to pay out 90 to 180 days later too as they typically do.

That's right Wally World will not pay you until they sell out of them, then here comes all the returns that they get back because customer didn't like it or it was the wrong color and then your stuck with it. Wally World is NOT friendly to deal with. Always figure you are going to finance them for at least 120 days or more. (there goes the 30% discount)
 
Well heres my take on it will it effect your present customer base such as delivery time and or quality. If so then definitly not. Do you have excess capacity that is not being used and can the influx of new business reduce your costs. Thus an increase in you profit margins over all. Then it might make sense as you will now not only make more then the 30% but your overall 50% will also go up.
 
Its possible you new customer will make something with the widget and take away the customers of your existing customer base. If they lose their customers then you are stuck selling your new customer all 120 widgets at 30 off.
As a salesman all I see is overall lower commissions.

But it would be tempting.
The best idea would be to get the lazy sales force out there to find new applications for the widget IMHO
 
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