Small business cost/profit margins

Question

I run a small candy business and I am getting ready to make my first large purchase of inventory. I am going to purchase $365 worth of candy. This purchase will be a total of 165 pounds of candy or 2640 ounces. I sell the candy in 10oz bags for $10. Each bag costs me 0.40 cents and I attach a logo sticker to each bag also. Each Sticker costs me 0.21 cents.

What is my cost per ounce to me and how much does the Customer pay per ounce in a 10oz $10 bag. After all upfront costs on the bag, candy and sticker what is my total profit margin ? I also offer shipping for free after a $30 purchase. Shipping usually costs about $7.15. What would my cost/ profit be if I pay for shipping ? Thank you.

Answer 1

To be honest, there are a lot of variables that you aren't considering. Generally speaking there are five costs one must account for to look at a pricing and P/L rates:

1. Direct materials - this example, candy
2. Indirect materials - example - cleaning supplies
3. Direct Labor - cost of person to pack and label bags if doing yourself
4. Indirect labor - ex. janitor
5. Sunk costs - utilities, rent etc.

Generally speaking, 2,4 and 5 are considered overhead costs, which I do not see info for. I do not see labor costs in your question and shipping costs needs to be put separated by when the costs apply, meaning costs for under $30 purchases and those over. getting you a specific answer will be near impossible with the info provided. However, I can provide a guide on how you can take a look at it. Example A is without the shipping cost, add shipping to those that have it

Example A.

Direct materials (Cost per 10oz of candy) * # of bags purchased + (Cost per bag plus logo) * # of bags purchased + indirect costs (all material costs used not directly related to candy and bagging over a weekly period then divided by workdays then work hours for average hourly indirect material rate then charge that rate to # of hour(s) expected to take to make the order of candy) + direct labor rate/time to do task * # of time it takes to complete job + indirect labor (all labor costs used not directly related to candy and bagging over a weekly period then divided by workdays then work hours for average hourly indirect labor rate then charge that rate to # of hour(s) expected to take to make the order of candy) + Sunk charges (all monthly charges you accrue during your business regardless of business flow into an average hourly rate * time it takes to complete order)

shipping would be a direct cost and should added in as such for each instance

Lets look at what we do know:

The purchase will allow you to make 264 bags of candy. $365 cost for candy / 264 bags = $1.38 per bag for candy alone. add in $.61 for a bag and logo and you get $1.99 cost on just the bag. Note: that is only direct material cost and nothing else!

For profit margin, you provided no info on what you are charging the customer so p/l margins are impossible to say.