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Pricing question - New contact manufacturing company creating a quote for brands?

Hello Experts,

I am working with a contact manufacturing company that needs to create proposals for co-packing jobs. They know their direct costs (ingredients and labor), but the overhead and step costs are TBD. Let’s use an example:

Candy Brand wants a quote for 12,000 units. Let’s assume they have not finalized their selling price. Internally, we know our direct ingredients and direct labor costs are $1 per unit. What should we charge Candy Brand for manufacturing their product? We are considering going out with $2 (2x markup and 50% profit margin) and hoping this will be sufficient to cover our overhead. Our gut says we need to have a little room for negotiation and can go down to 40% margin.

Now, to some degree, we know our fixed overhead per month is, about $8,000, so we could spread that cost across 12,000 units, but that wouldn’t make sense because at this time, we do not know if we’ll be doing 12,000 units per month or 24,000 units per month - it really is unknown and some brands take longer or shorter time to manufacture. However, let’s say our capacity is roughly 72,000 units per month, but whether or not we get to capacity is TBD. In a nutshell, it’s really unknown how to spread our fixed cost at this time.

If we go with 2x markup, we think it’ll sufficiently cover our overhead so should we forget about our overhead at this time? We have heard we should not use it in the calculation at this time. What pricing strategy we should use at this stage of our life cycle?


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