Product Evaluation Form

Step 1: Determine fixed costs Fixed costs are the business expenses that remain the same, regardless of the number of products produced or services provided. Wages, rent, marketing expenses, and equipment are examples of fixed costs. The sample table below illustrates the fixed costs encountered by most J companies. !t assumes a company of "# employees meeting "$ weeks. %&lease note' wages are not paid for the first meeting.( Expenses . J company employees wages %"" x ).*# hour( ,. J company officers wages %"" x )$ per meeting( -. .ent and other fixed expenses, paid to local J rea /ffice with sales tax upon liquidation 0. 1arketing supplies Sample Company $$ hours, )"" per employee, %"# employees x )"" + )""#( )$$ per officer, %* officers x )$$ + )""#( )$* Your Company

)$*

2. /ther

F. Total fixed costs

$ !"

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The 3uman .esources 0epartment can tell you what the agreed7upon wage structure is. For most J companies, the wage structure does not differ from the one previously noted8 it is the same as the wage structure specified in the -harter9,ylaws approved in 1eeting Two. The 1arketing 0epartment should recommend a marketing budget. :ote' Wages are variable costs because the number of workers and hours needed to produce an item or good can vary as demand increases or decreases. !n J companies, however, workers typically are ;employed< for a fixed number of hours. s a result, it is convenient to think of wages as a fixed cost for the purposes of this exercise. Step : Determine varia#le costs The company=s variable costs are the expenses that fluctuate or ;vary< with the number of goods produced and sold. For example, a company selling prepackaged candy will spend more on material as production increases. >ariable cost can be related to both production and the sales process. For each unit sold, your company will have to pay sales commissions and sales tax. !n 4tep 6 on the following page, you will have an opportunity to calculate these sales7related variable costs. The following worksheet will help you estimate the variable cost of material when additional units are produced. With assistance from the &roduction 0epartment, you will estimate your company=s material costs using the chart below.

Product . &ro?ected total cost of materials

Sample Company )"##

Your Company

,. 0ivided by the number of units

"##

C. $aterial cost per unit

$1

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Determine prices :ow that you have determined the fixed and variable costs for your product, you can establish a profitable price. The following chart will help you determine your gross profit per unit at various test prices. @ross profit is the difference between the price and the variable costs of producing and selling your product. 2nter one high and one low test price for your product. !nclude sales tax. Ase the material cost per unit from 4tep $. -alculate your gross profit per unit at different prices. Sample Price &1 )*.## 7.*# 7.$* 7".## )6.$* Sample Price & )B.## 7.B# 7.6# 7".## )D."# Test Price &1 Test Price &

'. (et price per retail unit )aria#le Costs ,. 4ales commissions %"#C( -. 4ales tax 0. 1aterial cost per unit %4tep $( E. *ross per unit

+nstructions: ,ine '. 2nter two test prices for your product. /ne price should be ;high,< and the other ;low.< ,ine -. 2nter the "# percent sales commission cost. ,ine C. 2nter the city and state sales tax amount. !n the example, the sales tax rate was five percent %)*.## x .#*+.$*(. ,ine D. 2nter the materials cost per unit from 4tep $, Eine -. 4ubtract Eines ,, -, and 0 from Eine , and enter the result on Eine 2. ,ine E. This is your gross profit per unitFthe difference between your price and the variable costs per unit of production and sales.

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Determine t/e #rea01even point break7even analysis frequently is used by manufacturing companies to set prices. !t helps a company determine the number of units that must be sold to cover costs %or break even(. Sample Price &1 Sample Price & Test Price &% Test Price &.

Fixed -ost %4tep "( 0ivide the @ross &rofit per Anit -rea01Even Point 2units3

)$G#

)$G#

)6.$*

)D."#

4% units

55 units

+ndividual and *roup Sales *oal fter you calculate the break7even point for the desired price, determine how many units each employee will need to sell to break even. What about making a profitH fter you reach the break7 even point, your company begins to make a profit. The more you sell, the more sales commission you earnI +ndividual sales 6oal' JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ *roup sales 6oal' JJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJJ

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