How to calculate cost of goods sold and margin is a basic tenet of business. If you are in business and have no idea what I’m talking about, you will likely not be in business very long.
So let’s do a lemonade stand. So we will take a recipe and make a batch of lemonade.
Cost:
$1.97 Sugar 5 lbs
$1.00 per 3 Lemons
$3.99 Cups (50 pak) or 12.5 cents a cup
$1.99 Straws (50 pak) or 4 cents a straw
Ok, the basic recipe calls for 1 cup of sugar, 4 – 6 lemons, and 1 cup of water to make 6 servings
1 cup of sugar is about 12 ounces by weight. Cost of the sugar for the recipe is 30 cents.
Let’s go with 6 lemons because we want it strong (actually the recipe calls for 1 cup of lemon juice so depending on how big your lemons are will determine the number of lemons). So $2 for lemons.
Water will basically cost out as free.
Total cost for 6 servings? $2.30 or 38 cents a cup.
So we sell it for $1 and we make 62 cents a serving, right? Wrong. You didn’t factor in the straw and cup, 54 cents is the real cost of goods. So if you sell it for a buck your margin is:
(price – cost) / price
(1.00 – 0.54) / 1.00 = 46% profit margin
Quick pricing methods for profit?
Keystone pricing is where you just double the cost of goods to insure you have a 50% profit margin. So we would keystone the cost of good and charge $1.08.
Price a triple the COGS and you will get a 66% profit margin.
Of course the old adage is to “Price what the market will bare!”
4 comments ↓
Hi Geoff, What you were calculating is the end product of sugar. Do
you have a COGS Calculation for MAKING WHITE SUGAR? The COGS will
be devided into 2 parts: 1. The Cane Production and it’s COG 2. The
Factory COG when they produces the white sugar. Those 2 COG
involves many factors. That is what I am looking for. OK my friend.
Not many managers are keen to know this COG Calculation. Only the
owners, to know whether this project is profitable or not. ee you
then. Boy Suwandi. Jakarta Indonesia. Cell – +6281380114600 email
ptejtm@centrin.net.id
Boy, If the business is run by two different process centers then
yes you can do two different COGS calculations. In general, you
probably combine them as a single COGS. It does get complex with
labor and processing of materials. Those factors hopefully can be
quantified and put into the COGS calculation, otherwise it is just
listed as fixed/variable cost overhead for the entire operation. I
don’t like to have too much going on in fixed/variable general
overhead in a business because from a management standpoint you
don’t have enough data to make a decision such as, “if I add 10
more people what would be the change in my production output?”
Geoff- I hope you are doing well. I own a small auto parts store. I
have more than 100 products with different margins. It’s not easy
to count the inventory every month and if I take average that’s not
goingto be right either because some products have very low margin
but sell alot and some have very high margin but sell few. What’s
the best and easy way to calculate COGS for this kind of store.
Thanks
Calculating COGS is calculated the same for each product. If you
buy 1,000 O-rings for $10 then your cost is 1 cent. Sell them for 3
cents and you make healthy margin. Pricing items is really a
judgement call by the store owner. You price what the market will
bare. Certainly high volume items is what brings folks in so you
might want to keep those prices competitive. Low volume items are
tough. Certainly you want the product on hand but you want your
inventory very low. Cash tied up on the shelf for a long time is
not a good way to run a business. What you are looking at is
turnover. If something is turning over quickly then maybe having a
high margin on it is not as important. If items have a low margin
but do turnover, you need to have a good margin and close eye on
inventory. If something is not selling at all, price it to sell and
get rid of it and hopefully get you money back out of it.
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