londonleah
New member
Hi, may I please get some help? I can't wrap my head around how my company sets prices for the service we sell.
This is how we do it now:
Scenario A
Direct COGS (consumables) $10.00
Other COGS (3% of sell price) $1.50
Manpower $25.00
Opex (10% of sell price) $5.00
Total Cost $41.50
Sell Price $61.40
Profit Margin 17.0%
Say for each service we provide, the fixed costs are the consumables at $10, Manpower at $25. Total direct costs $35. However, misc costs, overheads and operating expenses are calculated as a percentage of the arbitrary Sell Price. Now I can understand that some costs are directly proportionate to Sell Price, like credit card fees, but "Other COGS" at 3% also account for relatively fixed things like stationery and other shared consumables.
The part where I cannot understand why is Operating Expenses are set as 10% of Sell Price. This is mainly supposed to be rent and utilities (power/water/internet etc.). If I wanted to increase my profit margin simply by increasing the sell price (assuming the customer is happy to pay, just cuz), my Total Cost increases.
The company came up with the 10% Operating Expense to Sell Price ratio by analyzing past data, that's fine and all, but does that mean that it can be used to calculate the total cost?
Increasing my sell price say from $50 to $60 has zero impact on the sunk cost that is our rent/utilities. From the above scenario, if I wanted to increase my margin from 17% to 30% I would have to charge $11.40 more, and now my total cost has magically increased from $41.50 to $42.98. This makes no sense to me at all. Do I just not get it, or how can I convince my boss that the way we calculate our costs/margins is illogical?
Scenario B
Direct COGS (consumables) $10.00
Other COGS (3% of sell price) $1.84
Manpower $25.00
Opex (10% of sell price) $6.14
Total Cost $42.98
Sell Price $61.40
Profit Margin 30.0%
This is how we do it now:
Scenario A
Direct COGS (consumables) $10.00
Other COGS (3% of sell price) $1.50
Manpower $25.00
Opex (10% of sell price) $5.00
Total Cost $41.50
Sell Price $61.40
Profit Margin 17.0%
Say for each service we provide, the fixed costs are the consumables at $10, Manpower at $25. Total direct costs $35. However, misc costs, overheads and operating expenses are calculated as a percentage of the arbitrary Sell Price. Now I can understand that some costs are directly proportionate to Sell Price, like credit card fees, but "Other COGS" at 3% also account for relatively fixed things like stationery and other shared consumables.
The part where I cannot understand why is Operating Expenses are set as 10% of Sell Price. This is mainly supposed to be rent and utilities (power/water/internet etc.). If I wanted to increase my profit margin simply by increasing the sell price (assuming the customer is happy to pay, just cuz), my Total Cost increases.
The company came up with the 10% Operating Expense to Sell Price ratio by analyzing past data, that's fine and all, but does that mean that it can be used to calculate the total cost?
Increasing my sell price say from $50 to $60 has zero impact on the sunk cost that is our rent/utilities. From the above scenario, if I wanted to increase my margin from 17% to 30% I would have to charge $11.40 more, and now my total cost has magically increased from $41.50 to $42.98. This makes no sense to me at all. Do I just not get it, or how can I convince my boss that the way we calculate our costs/margins is illogical?
Scenario B
Direct COGS (consumables) $10.00
Other COGS (3% of sell price) $1.84
Manpower $25.00
Opex (10% of sell price) $6.14
Total Cost $42.98
Sell Price $61.40
Profit Margin 30.0%