Product Costing

ketchup Example
Variable costs
Item Cost Unit
Harvested raw ketchup (includes harvester's labor) $0.75 1 kg of ketchu
Post harvesting cleaning, straining, etc. $0.15 1 kg of ketchu
Bottling cost (sterilizing, etc.) $0.10 1 kg of ketchu
Bottle and labels $0.15 1 kg of ketchu
Transportation $0.15 1 kg of ketchu
Taxes and royalties $0.05 1 kg of ketchu
Other costs $0.00 1 kg of ketchu
Variable costs per kg of ketchup:

Fixed costs
Item Cost Period of time
Marketing ads $500 Annual
Management and administration $3,000 Annual
Business registration, fixed tax $150 Annual

Items you would need to depreciate Cost Useful life in years*

Bottling machine $1,500 10
Factory building $4,000 20

Items you would need to amortize Cost Payback period in years

loan @7% interest $5,000 3

Total fixed costs:

There are now many accessible websites that allow you to calculate amortization
on any loan amount, interest rate, and payback period - try the one below
http://www.hsh.com/calc-amort.html

Useful life = how long it will last before you need to replace it
Annual depreciation is done using "straight line" method.
This means all you do is divide the item's cost by its useful life.
For simplicity, this presentation does not consider tax code definitions of useful life

Have to make an assumption on how many kg of ketchup per year you can produce and sell

If fixed costs = $5,853.00

If you sell 1,000 kg then per kg fixed cost = $5.85
If you sell 2,500 kg then per kg fixed cost = $2.34
 If you sell 5,000 kg then per kg fixed cost = $1.17
If you sell 10,000 kg then per kg fixed cost = $0.59

Cost per kg of ketchup (at 5,000 kg volume ) = variable plus fixed costs:

Example Worksheet for Product Pricing and Break Even Point

Above example shows per kg of ketchup costs $2.52 when you sell 5000
It means the ketchup must be priced above $2.52 per kg to be profitable at this level.

Total variable cost varies with level of production and sales, while per unit variable cost stays the same.
Total fixed cost remains fixed for level of production and sales, while per unit fixed cost varies with

quantity of production and sales. Depending on sales volume, you can adjust the pricing. But you should
not sell product below cost.

When you subtract variable cost from the selling price, you get the margin (contribution margin), which
contributes to the recovery of your fixed costs and profit. You will have to sell a certain volume of
ketchup before you can start making profits. At one point (called the break even point or BEP ), your total income
equals total costs, and you make no gain and no loss. This volume level, BEP, gives you the amount of ketchup
you must exceed in production and sales to start earning a profit.

Variable costs per kg of ketchup = $1.35

Total fixed costs = $5,853.00

Contribution margin, BEP, and profit at variable selling prices

Selling price per kg of ketchup-> $2.00 $3.00 $4.00
Contribution margin per kg of ketchup -> $0.65 $1.65 $2.65
Break even point (kg of ketchup)-> 9,005 3,547 2,209
If you sell 1,000 kg then your profit = ($5,203) ($4,203) ($3,203)
If you sell 2,000 kg then your profit = ($4,553) ($2,553) ($553)
If you sell 3,000 kg then your profit = ($3,903) ($903) $2,097
If you sell 4,000 kg then your profit = ($3,253) $747 $4,747
If you sell 5,000 kg then your profit = ($2,603) $2,397 $7,397
If you sell 6,000 kg then your profit = ($1,953) $4,047 $10,047
If you sell 7,000 kg then your profit = ($1,303) $5,697 $12,697
If you sell 8,000 kg then your profit = ($653) $7,347 $15,347
If you sell 9,000 kg then your profit = ($3) $8,997 $17,997
If you sell 10,000 kg then your profit = $647 $10,647 $20,647
If you sell 11,000 kg then your profit = $1,297 $12,297 $23,297
If you sell 12,000 kg then your profit = $1,947 $13,947 $25,947
 Amount per kg
$0.75
$0.15
$0.10
$0.15
$0.15
$0.05
$0.00
$1.35

Annual total
$500
$3,000
$150

Annual depreciation*
$150
$200

Annual amount due

$1,853

$5,853.00

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 Most likely sales quantity

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Break Even Point

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$5.00
$3.65
1,604
($2,203)
$1,447
$5,097
$8,747
$12,397
$16,047
$19,697
$23,347
$26,997
$30,647
$34,297
$37,947