Volume pricing and production

      Figuring out what prices to charge for large volumes. January 28, 2002

Q.
I have been asked to provide a price quote for quantities of 1, 25, 50, 100 and 500. I don't know how to figure prices for the larger quantities. Is there any industry standard for determining these?

Forum Responses
When producing a product, you incur certain costs before you make the first part, and you incur certain fixed costs that really do not change much with volume, and then you have costs that decrease with increased volume. So, you will want to recoup your up front costs either through a setup fee or amortized by the quantity of parts. Then you have the "fixed" cost per unit, and you have the economy of scale costs.

For instance, for 1 part.
Model 101a Widget:
Up front costs: 1 hr programming, 1/2 hour fixturing for 1 part.
Shop rate = $50, up front cost = $75
Fixed cost: $150 material

Scaled cost: Labor, 2 hours for one part = $100

Part cost in one-off case: $325

Ok, that breaks out to 100 to make it, and $150 in material, and $75 up front.

Let's say that material stays the same. In reality, you can often get better pricing when buying higher quantities. Up front costs might go up a little because you may be able to fixture better, for more parts and or more efficiency, let's say $250. Fixed cost: same, $150 (again, in reality, you will probably save on material due to buying or yield with multiples).

Scaled: Your machine cycle times will likely stay the same, but you can often benefit from multiple parts per blank, or per cycle, and will almost certainly benefit from more efficient loading/handling issues, and your employees will get better at making widgets with experience, even if it is only 5 or 10 widgets. Realistically, the second part will likely take only 3/4 the time to make, and you may see an overall improvement of a 50% reduction. The amount of improvement in the actual production of the part is highly dependent upon the tasks required for the product, and how each of those tasks or machining operations can be improved. For our example, let's say that the volume run sees a 25% improvement in labor =$75.00.

So for a longer run of 50 widgets, our Up Front cost is $250, Material is $150, and Scaled cost is $75. 50 parts = 250+(50*150)+(50*75) = $11,500. The cost per piece is 11,500/50 = $230, or $475 for the first part, and $225 for each part after that. Some people like to front load the order by way of setup charges, others just amortize it out over the run. Be careful about quoting an amortized price for 100 parts, and getting bullied into making 10 for the 100-piece price.

Again, in reality, most of the example expenses I used can be affected by volume, and I just picked them arbitrarily. The basic concept it to consider your startup costs, and amortize it over the size of the run. Also, the material costs and the production efficiencies usually get better with volume.



Assuming you are making something out of wood, I recommend you look into the Architectural Woodwork Institute. If the organization is right for you and your business, you will receive the AWI cost book as part of your membership. This book is being extensively overhauled and will be available on CD ROM eventually, but the old book is still very valuable in presenting a series of tables for most woodworking operations, each of which shows typical setup times and then the curve of efficiency as the number of like operations increases. It is particularly good for manual operations and will give you a very clear idea of how the curve operates. I have modified many of the tables to meet our actual shop experience, but the curve remains very accurate.

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