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Tutorial on Pricing Jewelry for wholesale


#1

First - I apologize to the real accountants out there. This is a
pricing plan that works for my artistic brain. I have used terms that
have real meaning in accounting because I don’t know any better ones
to use. This is a way to get it mostly right when I price my work.

I use three segments to determine wholesale pricing. I call them:
Direct costs, Overhead and Profit. This is an overview on how I go
about figuring a wholesale price. I’m using a fabricated brooch set
with a single cabochon as an example.

DIRECT costs are those that you can directly attribute to this
piece. In this segment is your labor (you do get paid for doing this,
don’t you?) and the cost or current value of the materials in the
piece. When you figure labor cost, be realistic about what you are
worth in the marketplace doing this work - not the great salary you
previously got as a computer executive. So in this example, direct
costs for this brooch are 45 minutes labor at $20 per hour - $15,
silver sheet and bezel at $4.65, pin catch, hinge and stem for $0.35
and a cabochon purchased for $10, for a total of $30.

OVERHEAD costs are computed annually and should have these
components:

  1. Space - costs for a year of having a space to work in - rent or
    mortgage, utilities, insurance, janitorial services, repairs.

  2. Marketing - costs for a year - wholesale trade show booth rental,
    travel, mailing, photography, website, printing, ads. I have not
    included juried art fair booth rental and jury fees because those are
    marketing expenses associated with retail sales.

  3. Amortization - this is the number that accounts for your bigger
    equipment - Add up the value of your shop equipment - flex shaft,
    buffer, tumblers, hydraulic press, sand blasting cabinet etc - and
    divide by 5. This is a simplistic estimation of the cost of owning
    your tools. For this example, all my big tools add up to a value of
    $12000. When divided by 5, we get $2400.

  4. Supplies - the annual costs of stuff you use up but are not
    directly attributable to this particular brooch - solder, compressed
    gas, saw blades, burrs, polishing compound, sand paper, etc.

Now this is the tricky part - add together the four components of
overhead. This is your annual overhead. To get it to a number you can
use for this piece, estimate the number of hours you work in your
studio for a year. If you work 8 hour days, 5 days a week, 50 weeks a
year, that number is 2000 hours. I know that only part of the
available hours are spent working directly on product so I use 1000
hours as my number. The other time is distributed to all the other
stuff an independent artist has to do - selling, ordering supplies,
thinking, designing, running to the post office, etc.

In this example - Space is $8000, Marketing is $5000, Amortization
is $2400, Supplies are $3000. So overhead is $18400 annually and when
divided by the number of hours in the studio (1000) is $18.40 per
hour.

PROFIT is the reward for having your own business, and to allow you
to take classes, send your kids to school, buy new equipment, retire,
etc. I figure profit as one third of the cost of wholesale. So I
compute profit as half of Direct cost plus Overhead. This number is
not your salary - that’s in the DIRECT cost computed above.

In this example - the wholesale cost of this brooch is calculated
this way:

DIRECT: $30,

OVERHEAD: 0.75 hours x $18.40 = $13.80,

PROFIT = ($30 + 13.80)/2 = $21.90

WHOLESALE = $30 + $13.80 + $21.90 = $65.70

Retail prices are usually double or more, so a retailer would price
this brooch for sale at about $135. You can make a living with this
kind of pricing. If you are pricing your work at material costs plus
some kind of mark up - and omitting your own labor- this brooch would
be priced at $45. Unless you are independently wealthy, you can’t
afford that simplistic pricing.

These are some things that I do to make these calculations
relatively easy. I have made a spread sheet that shows manufacturing
costs for commonly used metal products - sheet and wire by size in
silver and gold. It computes my cost of a foot of wire or square inch
of a particular gauge based on current market prices. When I do my
taxes, it is easy to extract the dollar amounts for overhead, and I
only need to do it once a year.

Here is a fun calculation to make - If you want to show a profit of
$10,000 this year, what would your sales number be? You need to book
$30,000 in sales.

For even more fun - you can work the equations above backwards. The
proof is left to the reader.

Judy Hoch


#2

Judy

Excellent way of doing this, excellent. I do have one thought to
add. You are figuring overhead and labor costs for 1000 hours a year
as other stuff is administrative. If you’re SELLING during that time
then selling pays for your OTHER costs and overhead. If you’re not
making sales, then you don’t have “income then”.

You might consider the idea of having wholesale customers also pay
you for the other 1000 hours.

David Geller

JewelerProfit, Inc.
510 Sutters Point
Atlanta, GA. 30328
(404) 255-9565 Voice
(404) 252-9835 Fax
david@JewelerProfit.com


#3

Hi Judy:

Amortization - this is the number that accounts for your bigger
equipment - Add up the value of your shop equipment - flex shaft,
buffer, tumblers, hydraulic press, sand blasting cabinet etc - and
divide by 5. This is a simplistic estimation of the cost of owning
your tools. For this example, all my big tools add up to a value
of $12000. When divided by 5, we get $2400. 

I think you don’t have to worry about being a “real” accountant. A
good pricing model is something that is workable for you and doesn’t
take forever to figure the price of your product. I think you have a
convenient model that does both.

I am confused on this one point though. Are you dividing by 5
because you figure your big equipment will realistically last 5
years? What do you do when you get to the end of that time period and
a piece of equipment is still fine to work with? How do you account
for purchases of new equipment?

Thanks for the help,
Kim Starbard
Cove Beads


#4

Hi Kimberly

I had the privilege of being able to take a couple of years of
accounting. It has helped me a great deal in understanding my
business. If you ever have a chance to take an adult evening
accounting course, try accounting. you might just find it very
useful, including how to price your pieces so that you have the most
efficient business model for the way you do business.

As for your questions:

What do you do when you get to the end of that time period and a
piece of equipment is still fine to work with

Income = Revenue Expenses. This is one of the prime concepts of
accounting

You are taxed on your Income. When you are amortize one of your
pieces of equipment (an asset) you are saying that you are paying
"rent" for that piece. The “rent”, is an expense representing the
cost of using that equipment, knowing full well that you have to
replace it some day. Technically it is called an amortization expense
and lowers the In come that your are declaring

Now let’s say that you have fully amortized the piece of equipment
you bought five years ago and you decided that it would last only
five years. That means its “residual value” is =240. Now, let’s say
that you sold it for ten dollars. The entry is “gain on sale”. You
are obligated to declare that =2410 as part of your income (at least
in Canada you are).

How do you account for purchases of new equipment 

When you buy a piece of equipment you are trading one asset (item
bringing future economic benefits) for another. in this case
equipment for cash (you may have borrowed the cash in which case you
have a liability matched against that cash). In Canada you are
allowed to declare only one-half of the amortization expense for the
year in which you bought the equipment.

You need to consult an accountant to help you decide what to deem an
item is when you buy it. It can be an expense (paper towels because
they are used in the year of doing business) or an asset (a rolling
mill that you can use for many years).

I used to provide seminars on these topics to people who were
considering a move to operating their own business. What I had to
get across to them was the difference between fixed costs (costs
that, no matter what happens, you must pay even if you have sold
nothing) and variable costs (costs that vary according to the number
of items you make and sell). It discouraged a lot of people from
starting their own business, but it saved a lot of them from losing
their shirt. And a word of advice, it’s the fixed costs that will
kill you every time.

Most importantly, find an accountant who can help you. The right
accountant will help you thrive no matter what business models you
use.

I am not an accountant. I just have great respect for them.

Yours verbosely
David


#5
I am confused on this one point though. Are you dividing by 5
because you figure your big equipment will realistically last 5
years? 

Is 5 years the standard amortization time on the IRS forms for
equipment? Seems to me I remember that figure.

Janet Kofoed


#6
Is 5 years the standard amortization time on the IRS forms for
equipment? Seems to me I remember that figure. 

Why would anyone take a 5 year depreciation instead of the Sec. 179
Deduction Allowance that allows a small business to write off a
large amount of capital expenditures in the year of purchase.
$100,000, I believe. It’s like taking a huge discount on things you
buy for the business!

Wayne


#7

Hi Janet:

Is 5 years the standard amortization time on the IRS forms for
equipment? Seems to me I remember that figure. 

Holy cow, I have not seen such a long set of instructions in my
life. You can find what you are looking for by doing a search on the
irs.gov (not irs.org) website on 2005 publication 946. A link should
come up, the document is called publication 946, how to depreciate
properly. I tried to wade thru it, but, sadly, depreciation is not my
strong point (you’ll see why when you bring the document up). In the
case of depreciable assets, I highly recommend the advice of a highly
qualified CPA. This stuff is complicated and a lot of issues can come
into play like % business use, leased property, the actual weight of
vehicles acquired for business use, etc. If I were to try to guess at
how long equipment may be depreciated, the first figure I would say
would be 7 years (in the US), but, if you re unable to determine
depreciable life by the table, you may have to default to 12 years.
Equipment does not mean computer equipment or software and it does
not mean office equipment. It means rolling mills, tumblers, anvils
etc etc. Does it mean your bench? I don’t know, is your bench pretty?
Can it be considered a piece of furniture? A little accounting joke.
You see why I changed careers.

Best of luck,
Kim Starbard
Cove Beads
p.s. If anyone finds the answer, let me know, thanks


#8

Hi David:

Now let's say that you have fully amortized the piece of equipment
you bought five years ago and you decided that it would last only
five years. That means its "residual value" is =240. Now, let's
say that you sold it for ten dollars. The entry is "gain on sale".
You are obligated to declare that =2410 as part of your income (at
least in Canada you are). 

This isn’t really the point I was confused on though. In Judy’s case,
she mapped out her pricing schedule and accounted for a 5 year term
for her larger equipment. According to her current schedule, at the
end of the five year term, she will have a dip in her jewelry prices.
If she buys a large piece of equipment anytime in the future, she
will have a spike in her jewelry prices. Unless, I am
misunderstanding the way her table works (which is entirely
possible) I’m not seeing how it evens out. Does that make sense?
Sometimes, I have a tendency to be vague.

Thanks
Kim Starbard
Cove Beads


#9

Hi Wayne:

Why would anyone take a 5 year depreciation instead of the Sec.
179 Deduction Allowance that allows a small business to write off a
large amount of capital expenditures in the year of purchase.
$100,000, I believe. It's like taking a huge discount on things
you buy for the business! 

True. For taxable years beginning after 2002 and before 2006, you
can deduct up to 100,000 of the cost of property (equipment,
machinery, computers etc) in the year purchased. This is only allowed
to the extent that you have income to cover the deduction. For
example, if your income is 100,000 or greater after all other
deductions are taken, then you may deduct the 100,000. Deducting the
100,000 is not allowed if it throws you into the red however. You can
"carry the deduction forward" though. You can take as much as
possible this year and then take the rest in coming years (until the
deduction is all used up). With carry forwards, there is usually a
time limit though (like 3 years or 5 years) I don’t know what the
time limit is on Sec 179.

Usual disclaimer, CPA’s are necessary. They work with this stuff
every day.

Best Regards
Kim Starbard
Cove Beads