A cost analysis was conducted to give an indication of the different costs and potential profits. Per point of the costs analysis there is a description of estimated prices and how those were established. Three scenarios were analyzed: the worst, expected and the best scenario. The worst scenario is 50% higher costs than the expected scenario and the best scenario has 50% lower cost than the expected scenario. There are also two scenarios concerning the sales price of the entire SlimLine package. Scenario one is with a sales price of €30, the original sales price. The second scenario is with a reduced sales price of €20, in case of unexpected circumstances, such as new competition. Thus, In total six different scenarios are calculated with six different profits or losses
The material costs are an estimation of the real material costs. A 3D model of the SlimFit was made in SolidWorks, using this model the volume of materials could be estimated. The material costs in €/m3 could then be determined using CES edupack. Calculations yielded a material cost of €1.06 per SlimFit. The thin walls inside the canvas bag are made of recycled plastic from EMSA’s factory, so negligible costs are assumed here.
The process costs are a very rough estimation, as no specific information could be acquired online. It is assumed to be somewhere around €5 per product.
It assumed that the inventory costs are 10% of the sales price per year. It is assumed that a produced canvas back will be in stock for one month. As the target price is €30, the total inventory costs will be €0.25 per product.
The material when ordered is unprocessed, so it still needs to be processed after the bag is made. Painting can be done cheaply and efficiently. A cost of €1.50 per product is assumed. It could be that there are unforeseen costs for finishing the product, such as applying coatings. So another €1.00 is added for finishing the product. In total the finishing costs come to €2.50 per product.
For estimating transportation costs, average transportation costs were used. It turns out that there is not one number that can be accounted as average transportation costs, in particular not for one industry as specific as the clothing industry (The clothing industry comes most close to the canvas bag). However, a source with a simple formula to approximate the transportation costs was found and used. According to the article the average transportation costs of an average company is 8.48% of the total sales. That means for one product that the transportation costs are 8.48% * €30 = €2.48. Also here the cheapest, expected and worst scenario are worked out. For a sales price of €20 the transportation costs are €1.70 (source, page 22).
For the canvas bag low costs are expected, because of the knowledge and already existing machinery of the weaving company. However, there are some development costs for the product. Assuming a small design team of two people, who are being paid €60/hour on average and works on the project for two full weeks. Salary costs are then €9,600. Other costs, like for the software, order costs, prototype costs etc to be €25,000. So a total cost €34,600.
In the costs analysis document a first production run of 10,000 products is taken. The full development costs are spread over the first batch. That also means when EMSA decide to make also a second batch, the profit per product is more than of the first batch.
Bottom line, in the end profit is about €7,66 per product according to our calculations for the sales price of €30. It depends a little bit on the country where you sell your product due to the sales tax. Of course it also depends on the level of transportation costs. If all the costs are 50% lower than expected EMSA makes a profit of €16,23 per product, again for a sales price of €30.
The direct costs, the investment which EMSA has to make, are €34,600. All the extra costs, the costs made for producing one extra product, are €13.67.
A cost calculation for when the sales price is less than €30 is also made. Let’s say that the sales price will go down to €20, due unforeseen competition or other circumstances. According to the cost calculations (download sheet), when EMSA sells the product for €20, the break even point is reached at 4,765 pieces. That is an additional 2,647 pieces compared to the scenario of €30.
The SlimLine is a profitable product line. In the worst scenario a total cost of €25,70 was reached and the sales price is €30. There is also one scenario where there is a loss of €7,77, with a sales price of €20.
If normal circumstances are assumed, with a sales price of €30 EMSA can make €7,66 profit per product. If all the costs are 50% higher than expected, a small loss per product of €0,90 is made. If all the costs are 50% lower than expected, a profit of €16,23 per product is made.
Also, for the reduced ask price the transportation and inventory costs are also lower as these are calculated based on asking price. See the calculations of this costs in the other paragraphs above.