Product and Price – Cheap Research Essays

Following your conversation with Bill you have realised that you need to think seriously about your product. You have had some advice from an

experienced engineering manager who told you.

“In designing an engineering product the project engineer must also be able to cost it. He/she must ensure that when it is manufactured there

will be sufficient margin above the direct costs of assembly, labour and bought in materials to pay for the indirect employees and overheads of

the company as well as generate a profit. The project engineer should be able to calculate a minimum selling price for the new product that

will meet these criteria………… Remember that in the real world, selling price bears no relation to production cost, it is the market that

ultimately sets the price it is prepared to pay for a product.” (A Lamming)

So how much will your product cost to produce?
How can you minimise production costs?

Learning Outcomes
Following this PBL cycle you should be able to:

o Explain what is meant by the terms
o minimum selling price
o margin
o overheads
o indirect labour
o Calculate the costs associated with materials and assembly of your product.
o Discuss the contribution of ‘overheads’ to product cost.
o Discuss methods for assessing the cost of overheads for your product.
o Explain the contribution of fixed costs and variable costs and their relationship with production volume and unit production cost.

Resources
Library Catalogue
Engineering Management (Mazda, Addison Wesley) or similar

Internet
http://www.is4profit.com/
www.startinbusiness.co.uk
www.bbc.co.uk/learning/subjects/business_studies.shtml
http://news.bbc.co.uk/1/hi/business/
www.businesslink.gov.uk/bdotg/action/home?&domain=www.businesslink.gov.uk
www.smallbusiness.co.uk
www.startups.co.uk
Introduction:
As a first year students I have been through 4 different scenarios in order to discuss my
product with different people starting from 01/10/2015 till 22/10/2015. In the first scenario I
had a discussion about the developed electronic device with the local barman. Therefore,
exploring limited liability partnership will give better understanding especially in clarifying the
reasons for this choice will be provided. Regarding the second scenario, was about a
discussion with Bill regarding the requirement for capital. A List of possible sources of
finance and different types of grants as well as explaining the concept of ‘matching’ in the
context of raising money for business purposes will be highlighted. After that, in scenario 3,
there was a discussion with the manager which led to exploring some financial terms will be
highlighted such as minimum selling price, margin, etc. Then, a table of the product cost for
1 bracelet will be analysed. After that, some methods of assessing the cost of overheads for
products will be illustrated. Finally, there will be an explanation of the contribution of fixed
costs and variable costs. In the last scenario, the focus will be on Market Research
explaining how pricing affects customers.
What is a limited liability partnership [1]?
An LLP is a partnership where the partners have limited liabilities therefore one partner is not
responsible or liable for another partner’s indifference and misbehavior. The membership of
an LLP combines both ownership and the right to manage the business.
Overview [2]:
One of the legal alternative business structure in the UK. Starts with two or more members
(person or company). To establish limited liability partnership, there are a few points that
need to be included (name, two designed members, registered address, LLP agreement and
register LLP companies house). The designed members have more responsibilities than the
other members for instance, signing and delivering accounts to the registered companies
also, booking appointments and notification of membership changes.
Register LLP [2]:
There are many ways to register the LLP. Firstly, electronically it takes 24 hours to be
registered or pay higher fees and before 3pm. secondly, use an agent to register the LLP
and the cost depends on the agent. Finally, download and fill the application and send it by
the post.
Tax [2]:
Each member have to pay his tax individually from their share of profits. Partnership selfassessment tax must be sent by partnership to HM

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Revenue and customs every year. When
it comes to taxation every partner should send personal self-assessment tax, pay income tax
from their profit share and national insurance.
Limited Liability agreement [1]:
When setting up a limited liability partnership an agreement has to be given and signed by
all members of the partnership. This agreement should cover every duties and
responsibilities the members should do. The agreement usually says about the management
of the LLP, the division of the profits made by the LLP, the way decisions are going to be
made, the capital contributions of each member, about dispute resolutions and provision
about any changes for the LLP agreement.
Reason for choosing LLP [1]:
Compared to other business structures the LLP provides more security on the personal
wealth of each member, and this structure is more flexible allowing every member to
participate in the management and maintenance of the partnership. Raising and utilization of
funds in an LLP depends on the partners will and there is no maximum limit for the number
of partners in LLP so there is no limit in its growth. There is no requirement of minimum
capital and there is separate legal entity so partners are distinct from each other.
Capital requirement shows the liquidity require to be held for a specific level of assets in
agencies like the federal deposit insurance and the bank of the international settlements.
The capital requirement ensure to not participating or holding investments that increase the
risk of default by these institutions.
List of finance sources:
1. Tax increment financing, or known by TIF. The TIF is geared toward real estate
development in targeted area.
2. Friends and Family members. They might be the most permissive investors of the
bunch.
3. Customers
Why is gearing in business?
Well when people talk about “gearing” they refer of two types of gearing:
1. Financial
2. Operational
Meaning of matching in the context of raising money for business purposes is the more a
raise occur, the business will give the same amount equal to the raise.
The soft loan for the concept of matching. The main reason of a soft loan that include
reduced interest rates and no security required before the loan granted. However, payment
holiday, in many cases the loan will not have to be repaid until the business is making a
profit
There are different type of grants to start up such as:
 investment
 innovation
 energy and environment
These schemes recognise the additional cost for business adopt or engage in investments.
Minimum selling price: Obtaining materials, manufacturing product and items for sale. This
contain mathematical calculations to find the lowest price for the product. Summaries how
much one product cost and then add the incidental costs which associated with the
company.
How much does it cost the materials for one unit?
 Labour cost and shipment
 Add these two to find total cost.
 Multiply with 50% for insurance and expenses for shipments.
 Add another 20% for the minimum profitable price.
Margin: The difference between the cost of the product and the price which need to build
the product. The operating margin concern the income after the paying variable cost of
production such as wages and raw materials. Operating income can calculate after removing
operating expenses. The formula for this calculation is operating income over the net sale at
a certain time.
Operating Margin = operating income/net sales
Overheads: Is an accounting term. Overhead must be paid continuously irrelevant if the
company has high or low volume. Expenses is not only the product will create, are the rent,
utilities, office supplies, repairs and maintenance, insurance, taxes, salaries relating to
human resources and accounting.
Indirect labour: They do not occupy with the creation of the goods or service. The person
who makes the production possible and efficiency. Are cost to the general accounts and are
involved to the indirect costs.
Table of the product cost for 1 bracelet:
Components all from
China
Quantity: Cost for
3mm Led (3v) 1 £0.14
Coin Button Cell Battery
Holders Socket on/off
Switch
1 £0.24
Battery 1 £0.43
Strap 1 £1.21
Soft fur fabric 1 £0.84
Total Cost: £2.86
Overhead to product cost: The indirect cost is benefit for the production of a product or the
services provide. It is a share resource that cannot reduced on a service or product. The
overhead cost is changing from the fluctuations of the production. The total overhead cost
may related to indirect cost and the company may calculate the product cost per unit which
this related to the sum of cost allocation or to the individual cost.
Methods for assessing the cost of overheads for your production:
 Overhead cost analysis: One small company must take into consideration the costs.
Have to find a way to divide the costs into a categories and see from where are coming
all these costs and how can confrontation this problem. By doing that there will be a
plan to solve the problem and reduce their costs. (e.g. electricity)
 Cost center accounting: It is occupy with the factors that bring money to the company
known as (profit centers) and with this that charged with expenses known as (cost
centers). Cost centers allow to the owner to analyses the expenses with the incurred
inside the company.
 Activity-Based costing: This analyses the processes how to rise the products and gives
them the indirect cost. Costs, activities and products recommend indirect cost with the
products higher grade of accuracy.
 Cost element accounting: Primary cost include raw materials, fuels, and electricity and
staff salaries. Secondary cost is the cost assessment, settling orders and inside
activities.
Fixed cost: Not changing the amount of goods or services. Expenses that have paid from
the company. It is one of the two components of the total cost of good or service.
Variable cost: Depending on the volume of the company. Increase and decrease the
production (It depends on company’s creations). Is such as rent, insurance, taxes and office
suppliers, will be the same regardless the production.
Relationship between them: The break-even point find it by dividing the fixed costs per unit
sold. The volume is the sales, for example one company which sales machines to find the
break-even point must sell 100 of these per month so the variable and fixed cost helped. So
the company knows that to have profit must sell these amount every month.
Market research has a significant impact for small businesses this may determine the
success rate of one’s business as it is safer to rely on the strong information gathered from
market researching rather than one attempting to guess what may work for the business or
not.
The main point of market researching is to help one analyses the following things in order to
help improve the business. The type of customer groups ones business may attract, other
business competitors so they are aware of how to improve their marketing strategy in order
to remain at a decent success rate and attract more customers and to generally have an
over view of the business environment you are in. A reference price is one of the main
strategies by which you can predict the price of any product. For instance, you expect the
price range of a mobile phone to be 2000 pound. Therefore you realize that 2001 pound to
be more expensive while 1999 pound is cheaper. As soon as you see the price your mind
can recognize if it is less or more than what you expected. Unsuccessful reflection of price
promotion would cause confusion for the loyal customers.
Pricing in a business has several objectives and each objective has a different point of view
in every sector and the company’s market. Most of the objectives have a profitable unit price,
which can gain the company’s ambition in achieving their goals and expanding their
reputation widely. The difference in aims by every objective contains a condensation in
pricing units, which consists every markets conditions, and what each market is relieving to
the company by customers and positive income.
The 6 objectives are:
1. Survival – Where the market has not enough customers and intensive competition. It
provides variable costs and fixed costs to stay in the market.
2. Maximum current profit: High prices to produce high cash flow or return in investment
because of weak competition in the market.
3. Maximum current revenue: Companies increase sales revenues (unit sales multiplied
by unit price) calculated in different price points.
4. Maximum sales growth: Higher long-term profits by achieving a high unit sale in order
to get lower unit cost. Also, called market penetration pricing.
5. Market skimming: High pricing to capture wealthy customers who are looking for an
innovative for example by a new technology product.
6. Product quality leadership: Where a company aims to provide the best quality product
in the market, and therefore charges more than its competitors. These companies are
usually market leaders.
Conclusion:
To conclude, this report has gathered these 4 discussions which formed in 4 different
scenarios. These discussions were very helpful to get the Barman, the lorry driver and the
managers’ ideas and opinions in order to help the students with his product. Each scenario
has focused on one area. The first scenario was about limited liability partnership with all the
details have been explored above. The second one has highlighted the financial sources
and mentioned some kinds of grants. The third scenario has illustrated some financial terms
explaining the cost types as well as an analysis of the cost of one of the products. The last
scenario was mainly about the product, marketing research and pricing strategies.
List of Reference
1. Lentells Ltd Chartered Certified Accountants. (Unknown). Overview of Limited Liablity
Partnerships – advantages and disadvantages. Retrieved from
http://www.lentells.co.uk/press-releases/overview-limited-liablity-partnershipsadvantages-and-disadvantages.
2. GOV.UK. (2015). Set up and run a limited liability partnership (LLP) . Retrieved from
https://www.gov.uk/set-up-and-run-limited-liability-partnership.
3. http://www.ehow.co.uk/how_8493491_calculate-minimum-selling-prices.html
4. http://www.investopedia.com/terms/o/overhead.asp
5. http://www.investopedia.com/terms/o/operatingmargin.asp
6. http://www.businessdictionary.com/definition/indirect-labor.html
7. http://www.nibusinessinfo.co.uk/content/challenges-sourcing-overseas
7. http://smallbusiness.chron.com/calculate-overhead-cost-per-unit-40116.html
8. http://smallbusiness.chron.com/overhead-cost-control-method-75570.html
9. http://www.investopedia.com/terms/f/fixedcost.asp
10. http://www.investopedia.com/terms/v/variablecost.asp
11.
12. http://www.ebay.co.uk/itm/10PC-DIY-CR2032-3V-Button-Coin-Cell-Battery-Holder-CaseBox-On-Off-Switch-Black-/141714328931?