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to “produce one more.”
If you are merely considering whether to make and market a new widget (i.e.,
a feasibility study), then sure... amortize all or your pre-production costs,
amortize them over a reasonable production run projection, and enter that cost
of production instead. (But if capital costs and R&D are already “spent
money,” don’t factor them into your cost of production.) See below for how
to run a “Trial Balloon .”
We realize that per-unit costs will vary with the size of your production run
(unless you are selling digital goods!). Simply enter your best estimate as to
what that cost is most likely to be. Try different production-volume
scenarios...
For example, let’s say you make plastic doohickeys. The molds already cost
you $50,000 and the R&D was $100,000. Those costs are “sunk costs” --
they’re done. Don’t amortize these costs in your answer -- you’ve already spent
the money. Here’s what to do...
If your actual cost to produce each piece is only a dollar for a 100,000-unit run,
then you would enter “1.00” as your per unit cost. If your cost for a 10,000-unit
run jumps to $2.00 and if you want to see how that affects the outcome, enter
2.00 (don’t enter the $ sign) after you have reviewed the profits for 1.00.
But if you have not yet spent the $150,000 for molds and R&D, you have to
amortize that across the production run. That adds $1.50 per unit for the
100,000-unit run, and it adds a prohibitive $15.00 per unit for the 10,000 run.
Let’s look at a digital example...
You have already created an e-book. Enter “0” as your cost of production