Help File

F. Sales Office
Costs of Production and Operations
Your production costs include materials, labor, and production overhead. The cost of materials
represents the largest
share of your production costs. Materials costs are variable and are
determined by the production volume.

Each feature has a different material cost. These costs drop as your production volume
increases. Since some features
cost more than others, the features which you decide to include in
your brand design directly affect unit production costs.
Carefully review production costs as you
design each brand. They will establish a price floor for the brand, assuming you
intend at least to
cover your variable costs.

In addition to production costs, your prices should cover your company overhead expenses, often
referred to as General
Sales and Administration (GSA). Overhead includes interest on loans,
R&D, engineering, marketing research, advertising,
lease payments, or sales force salaries and
training, to name a few.

Interest, marketing research, engineering, leases, and sales force salaries tend to support all
brands equally. These
expenses can be allocated to each brand in proportion to its production
volume.

Some GSA expenses should not be allocated to a brand simply based upon the number of units
produced. For example,
the size of your investment in R&D and advertising will vary by
brand.

Therefore, these expenses, and others that vary by brand, should be allocated to individual
brands based upon actual
expenditures. The technique of allocating expenses to their correct
activity is termed Activity Based Costing (ABC). An
ABC analysis is provided in the brand
profitability section of the template under brand management.

Your price should also include a target profit level. Low-volume, high-ticket brands usually
include more profit than high-
volume, low-price brands. Keep in mind that your net profits will
determine your ability to expand from internally
generated funds and are a measure of your success.
Many executives fail to price for future growth.