If you produce your own products and want to resell them on a wholesale basis to various shops and resellers, it's important to figure out a wholesale price that covers your product and overhead costs makes a profit and still has a price that competes well with similar products on the market.
You can calculate your product's wholesale cost by building it up through assembling your costs and required profit. The example below illustrates how to accumulate the data to find the wholesale cost and profit margin of your wholesale product. The example uses a bicycle as the wholesale product.
Check General Market Prices
Your first step is to determine the potential market price for your product. What are similar products selling on the shelf for? Your product may have different features or a different niche appeal, so the price may not be exactly the same, but the competition's a good place to start.
If a typical bike is selling for $100 but your design has a unique, but not industry-changing design, then you may be able to sell yours at a slight premium, such as $120.
Determine Your Material Costs
Figure out how much your material costs are to produce each unit of product. How much does it cost, material-wise, to go from a bin of loose parts to a finished product and be ready to ship to the retailer?
In our example, you would need to know the cost of all the bicycle's parts, including screws, nuts, bolts, wheels, frame, seat, and more for each bike, including waste. Don’t forget the cost of packaging. For easy math, let’s say it costs $25 to buy the parts to assemble each bike.
Calculate Your Cost of Labor
How much did it cost you to pay someone to assemble the bike? This doesn’t include the salaried supervisor, the light bill, or the cost of catering lunch, just the direct labor cost of assembling the bike.
If you pay one worker $30 an hour and he can assemble two bikes an hour, then it costs $15 to assemble one bike. As of now, you know your bike costs at least $25 in material and $15 in labor, so $40 in total so far.
Now that you know the direct costs to assemble one bike, you can figure out your indirect costs. These consist of expenses associated with running the business but not directly involved in producing the product. Companies often call these costs overhead.
Overhead costs include costs for employees not directly involved in the assembly, such as utilities and rent, light bulbs, health insurance, advertising, and coffee for the planning meeting. These are all costs which have to be covered but aren’t directly part of assembling a bike.
Now, calculate your total cost per bike unit. Add up all of your indirect costs for one month of business, then divide by the total number of units produced. Let’s say your bike assembly company had $100,000 in overhead costs, and assembled 10,000 bikes, ready to sell wholesale.
That means it takes $10 per bike to cover all of the indirect and overhead expenses in your company on top of the cost of directly assembling the bike. Now you have $25 material costs, plus $15 labor costs, plus $10 indirect costs, totaling $50 in total cost. This means you have to sell each bike for $50 just to break-even in your company before you make any profit.
Find Your Profit Margin
You can estimate retailers will mark your product up by at least 100 percent. You might also do some due diligence to find out what the typical markup is in your industry or for your product type. If your bicycle will sell for $120 at a retailer, you might agree on a wholesale price to the retailer of $60.
You calculated that it cost you $50 to manufacture the bike, and if you decide to sell it for a wholesale price of $60 to the retailer, you’ll make a $10 profit per bike. Your profit margin percentage is the total profit divided by the total revenue. In this case, you would have $10 divided by $50, or 20 percent profit per bicycle.