Table of Contents
Absorption pricing is where you factor in all the costs associated with your product's selling price, including the proportion of your fixed costs and your profit margin. The clue is in the name: Absorption, where all the costs are consumed into the final price.
1. Calculate your cost price.
2. Add up your cost price and your profit margin.
In order to calculate your cost price, the first step to calculating appropriate prices for your wholesale products is to calculate your Cost of Goods Sold (COGS) and overhead costs.
Your COGS represents how much you spend to acquire the products that you’ll resell. This includes costs such as:
• Acquisition of products from your vendors/ suppliers
• Freight & handling cost
If you are a manufacturer or entrepreneur making your own products, your COGS also includes all the costs such as:
• Raw materials (e.g. fabrics, threads, zipper, buttons for a dress)
• Labor (e.g. employees’ salaries multiplied by time spent to produce items)
• Equipment (e.g. amortization or machine rental directly related to manufacturing products)
Overhead costs, also called indirect costs, exist regardless of the volume of products sold. They include fixed or variable expenses, such as:
• Office rent
• Rent for warehouse space
• Utility bills
• Equipment and software used to run your business, such as computers and inventory management software
This list is not exhaustive, so it’s important to consider the expenses your specific business incurs. For example, you might also want to consider the cost of inventory shrinkage due to theft or damage.
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