math majors only

harvey

if i had a job that the material and labor came to $2900.00
and have a overhead of 27% and wanted a 15% net profit what would my selling price be?

Nron_9

math?

Double it and add 30 is the rule right ?????

JimGPE_3

How 'bout this?

If your overhead is figured on cost, you would charge 2900 x 1.27 x 1.15 or $4235.45.

Is this a trick question?

JimGPE_3

Try this one....

Okay, I'm going to jump on this thread.

Three guys walk into a hotel, and they're going to split the cost of a room. The room is $30. They each kick in $10 and head up to their room.

The manager gets wind of it and tells the clerk the room is only $25. He hands five $1 bills to the bell hop (like a hotel with $30 rooms is gonna have a bell hop...) and tells him to go refund the guys' money.

On the way up to the room, the bell hop gets to thinking, as bell hops are wont to do, and says to himself, "no way they can split $5 over three guys, I'm going to help out."

He stuffs $2 in his pocket, knocks on the door, gives each guy back a buck and heads back downstairs to the desk, glowing in the warmth of a job well done.

So now each guy has paid $9.

$9 x 3 is $27 plus the two the bell hop stole - only $29!

WHERE'S THE OTHER BUCK????

harvey

4235.45 x 15% = 635.32
4235.45 x 27% = 1143.57
635.32 + 1143.57 + 2900.00 = $4678.89 Now what?

JimGPE_3

Wow!

I have no idea what you are trying to ask, but if you can sell the job for that, more power to ya! Your book keeper gonna buy you lunch!

Reminds me of the way you tell a good accountant. Ask him what 2 + 2 is. If he answers by asking, "What would you like it to be?"....

flange

Billy March

the other buck

That was a good one. Made me think for a while. You feel pretty silly when you finally figure it out!!!

David Branch

Your cost of 2,900 Divide by .73 (the reciprocal of .27) = 3,972 (3,972 minus 2,900 = 1,072 which is your overhead cost)
3,972 divide by .85 (the reciprocal of .15)= the sale price of $4,673. (4,673 minus 3,972 = 701 profit)

Test this by working backwards from your sale price of 4,673.
4,673 TIMES .85(again the reciprocal of .15) gives your cost plus overhead of 3,972.
3,972 TIMES .73 (again the reciprocal of .27) shows your cost of $2,900.

I have to say in my opinion there is no such thing as overhead. Each penny should be included in your cost of labor.

Don Walsh

selling price

$4673.65

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harvey

This was simply a math problem and not a real job. Thank you for the answer. I rememberd the reciprocal part but could not get it right. This WALL can answer any question.

JimGPE_7

Yep.

You have to talk pretty fast there at the end for it to work. You can't give anyone the chance to think.

Radiant Wizard

$4,674.00

That will cover your overhead mark up and you cost mark up.

Simple

2,900/.73 = $3,973.00 then divide that by .85 = $4,674.00

Unknown

next question

What number, divided by itself, has more than one answer?

Noel

Constantin

I'll bite

Zero?

Unknown

Yep.

I was more wondering who would be first to respond correctly, than anything.

Noel

scrook_2

No...

2900 would be divided by 1/1.28 = 0.7813, not divided by 1-0.28=0.72 [0.73 sic]

likewise 1/1.15=0.8696 not 1-0.15=0.85

But, instead of invert and divide, just multiply:

2900*1.28=$3712 (job + overhead cost)
$3712*1.15=$4268.80 (job + overhead) + profit margin
so quote $4269

$4674 is a 25.9% markup on cost + 28% overhead.

scrook_2

No...

Thge reciprocal of 0.27 is 1/0.27 =3.7037 and the reciprocal of 1.27 (what I think you meant) is 1/1.27=0.7874

The original question was 1.28 not 1.27 (a trivial differance but...) so 1/1.28=0.7813
not: 1.28-1=0.28 then 1-0.28=0.72 or 1.27-1=0.27 then 1-0.27=0.73. This is not the reciprocal (1 divided the number), nor does it correctly solve the problem.

Overhead is distinct from [direct]labor in that labor is the direct cost payed to the laborer to do the actual work required, overhead is the indirect costs, including insurance, utilities (gasoline, electricity, phone), office equipment & supplies (S/W, computers, chairs, pencils, etc.), tools (trucks, wrenches, etc.), *indirect* salarys (the cost of the laborer while the laborer sits in the chair waiting for the phone to ring or puts stock in trucks from shelves or UPS delivery, etc.)

You are correct though that every penny should be included in the labor bill to the customer. Thay all are costs of providing the service to the customer. The trick is to accurately measure the indirect cost to be spread out over the all the direct labor charges, and quickly identify significant shifts in it (e.g. sudden changes in cost of gasoline).

Jed_2

And of course

That clerk is really a service tech on commission!

SLM

Why?

Why are you taking the % from the end result of 4235.45?
The question you asked was mat/labor 2900 at 27% O/H with a 15% profit. So 2900x27% = 783 is the over head for the job.
Add 2900 and 783 = 3683 then profit is last after your mat/labor and overhead are paid. So 3683x15%= 552.45. Add 3683 and 552.45 = 4235.45 and you have 27% for O/H and a 15% profit added to the cost of labor and materials. 2900 is the base number not 4235.45 of course 27% of 4235.45 is going to be higher than 27% of 2900 same for 15%. any way you do it, it comes out the same watch 2900 x 1.27(1 being 2900 and .27 being 27 % of 2900)=3683 then 3683x1.15(now 1 is 3683 and .15 is 15% of 3683 = 4235.45 see. Another thing for the guys using reciprocals why???? your making a simple word problem difficult the more difficult you make it the easier it is to make mistakes this goes for everything not just math.

bob_25

Confused

I heard once that figures lie and liers figure:) If somethin costs you $1.00 and you sell it for $1.50 thats a 50% markup right? The profit though is only 33% of the selling price. Soooo what are we making on this job, 33% or 50%? I,ll stick to the technical side of the trade and leave the heavy thinkin to the boss. bob

JimGPE_3

One step further

If the item costs you $1, and you know from last year that it costs you 30% of your volume to sell it, and you want to make 15% profit, I think you sell it for 1 x 1.3 x 1.15. Who knows.

Mark Eatherton1

Frank Blau knows...

and he says to divided by the inverse of your intended profit margin. Too many great mechanics out there multiplying and then wondering why they have no money left at the end of the year...

It's a fact that 95% of the people that are in business for themsleves have no idea what their cost of doing business is. What is their break even cost per hour?

They charge "what the market will bear", and the end result is poor people giving poor service. They can't afford to give good service because of their market will bear attitudes.

How do I know this? Because I've been there and done that and went broke trying.

But it ISN'T going to happen again...

Divide by the inverse and don't feel guilty about doing it. All the other profitable business's do the same.

It's just business. For more information, go to Books and More on this web site and buy Ellen Rohrs books "How much should I charge?" and "Where DID the money go?" Both excellent books for beggining business people, as well as those of us that really don't understand business basics. It doesn't matter whether you're a T&M er or a F.R. er, you MUST know how to make money, or it's all for naught.

ME

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scrook_2

NO!

It is not intuitive, and I'm not good at explaining these things, so don't feel bad, but here goes:

It is a 50% mark up, ($1.00*0.50=$0.50 markup) $1.00 cost + $0.50 markup = $1.50 selling price) which is a 50% profit margin.

33% of the selling price in this case is 0.33*$1.00=$0.33 So selling price would be $1.00+$0.33=$1.33 but you said, in the same breath, the profit was $0.50 and the selling price was $1.50!

The COST was 66.6667% of the sales price. That doesn't make the profit margin 1-0.666667=0.33333 or 33.333%, (call it 33%) It does make the sale price 1/0.66667=1.50 or 150% and the profit is the sale price minus the cost or 1.5-1.0=0.50 or 50%.

Do not fall into the trap of treating multiplication (or division) -- which what the inverse is (1 divided by a number) -- as equivelant to addition (or subtraction).

Notice though, you can spin the perception of the thing two ways: I, the buyer, say: "Oh my, you are getting a 50% profit!" You, the seller, say: "My cost is 2/3rd's (let's just call it 67%) the price I'll sell it to you for!"

Quickly (but incorrectly) the mind says: ah, 67% of cost's a better (or worse, to the seller) deal than 50% markup, but mathamaticly they are the same -- one's just the inverse of the other! It's a tricky thing, and yes liars can (and do) figure (though figures DON'T lie)!

Then there are: "Lies, damn lies and statistics!" Samuel Clemens?

David Branch

Change your thinking to concentrate on the selling price. Profit, overhead and cost are percents of that selling price. The selling price is not a percent OF the cost...it is a percent ABOVE the cost. You have to work backwards from your selling price to find your costs and the only way to establish selling price when only your cost is known is to divide not multiply. Radiant Wizard and Grumpy are correct. But mostly ME is 100% correct in that Frank Blau is the man when it comes to this, maybe Dan can post some old P&M articles.

Original question;
if i had a job that the material and labor came to $2900.00 and have a overhead of 27% and wanted a 15% net profit what would my selling price be?

My answer which I still stand by;
Your cost of 2,900 Divide by .73 (the reciprocal of .27) = 3,972 (3,972 minus 2,900 = 1,072 which is your overhead cost) 3,972 divide by .85 (the reciprocal of .15)= the sale price of $4,673. (4,673 minus 3,972 = 701 profit)
Test this by working backwards from your sale price of 4,673. 4,673 TIMES .85(again the reciprocal of .15) gives your cost plus overhead of 3,972. 3,972 TIMES .73 (again the reciprocal of .27) shows your cost of $2,900.

I have to say in my opinion there is no such thing as overhead. Each penny should be included in your cost of labor.

I would like to clarify my original comment about overhead. I tried to be brief and it didn't come out right. There certainly are dozens of costs which need to be accounted for or they will surely come out of your pocket. I say that these cost should be addressed in your cost of labor not the cost of material. Overhead is more closely related to labor than material. One month you may sell 10 replacement boilers (a high material to labor ratio) and the next month only 10 jobs with re-pipes(a high labor to material ratio). Your overhead was fairly constant yet the 10 boilers subsidized the overhead that should have been charged to the 10 re-pipes.

bob_25

Scrook

You've got it. But- when General Motors or IBM or Microsoft report profit how do they look at it? bob

bob_25

Dave, I'm still

confused. When I punch .27 into my calculator and hit the reciprocal button I get 3.70 not .73 . Help ! bob

David Branch

I guess I didn't even know there was a key for that! I asked my kids the other day where the adding machine was and they laughed at me and said, "you mean the calculator"?

I just do it in my head. 1 minus .27 gives the reciprocal of .73. Maybe I'm using the wrong terminology, it's just what I was taught.

Now I'm off to do the reciprocal of surfing the net which is defined as: surfing the net/watching Sox vs. Yanks = yard work!

Geo_2

math

selling price $4,673.65 and it would be easy if some of you would just buy a calculator with a gross profit margain ( GPM ) key on it and stop with the dividing point this with point that. Some more simple math... you have a small log cabin and need to make $100,000 from the sale to buy a jet rocket car, the realtor wants 6% of the sale price... thats the sale price?? if you came up with $106,000 your going to wait for that jet rocket car a little longer... if you said $106,382.98 you understand Gross profit markup.

hr

$2900 = 58% of X

X being the unknown selling price. So 2900 divided by .58= a nice round 5000.

Although I would bid $4999.00

My sources want to know how you came up with 27% OH figure. Very low. Suspect you are not paying yourself enough.

hot rod

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harvey

YOU are correct

This was a homework assignment for a seminar I attended.
I used the $4673.00 number and was wrong. $5000.00 was the correct answer. Just a hypothetical problem. Thanks for your responce.

harvey

YOU are correct

This was a homework assignment for a seminar I attended.
I used the $4673.00 number and was wrong. $5000.00 was the correct answer. Just a hypothetical problem. Thanks for your responce.

harvey

YOU are correct

This was a homework assignment for a seminar I attended.
I used the $4673.00 number and was wrong. $5000.00 was the correct answer. Just a hypothetical problem. Thanks for your responce.

Constantin

Allow me to disagree

Your assumption that you can charge one labor rate for all jobs is correct as long as all the jobs require the same skills, tools, and other things. That may be true for your business. However, any kind of job shop with a plethora of equipment, processes, labor rates, etc. will do much better with an activities-based cost model at figuring out what to bid at than by applying a global shop rate.

For example, you may have jobs that require very technical equipment and highly-skilled operators while other jobs can be banged out by cheap apprentices with minimal tools. If your job mix changes, then the shop rate that was computed as an aggregate of historic shop costs will no longer be right. Furthermore, your customers may be taking advantage of you by selectively "biting" on RFQs you unknowingly replied to below cost.

Have a look at activities-based costing (ABC) for a better understanding of how the different accounting models work. As I stated above, ABC may not benefit you enough to be worth the trouble. A homogenous environment is easier to administer using the traditional costing techniques ... though beware of the death-spiral. Cheers!

hr

It's a simple math equasion

where X is the unknown. The check would be 58% of what is 2900? So the number has to be 5000. (5000 X 58% = 2900)

Your calculator will not lie, punch in 5000 times 58 and hit percentage key!

Still, knowing YOUR true cost of doing the job is critical to arriving at the correct selling price. Sounds like a practice example, still your % of OH seems low.

hot rod

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David Branch

Constantin-I didn't mean to imply one labor rate for all, I only said to apply all the OH cost to labor only not labor and material. And yes you can and should apply different OH costs to the applicable employee classification. Sorry for the confusion. I wish Frank Blau was still around because he really had a good way of explaining things.

Harvey and Hotrod- I don't mean to split hairs because we are both on the same page but your instructor is wrong. The exercise, as worded, did not ask for the combined 42% P&O, it specifically asked for a separate 27% OH and 15% Profit. We don't know why they asked us to break it down that way but they did. Perhaps the foreman gets a piece of the profit only or an accountant was challenged to cut down on an overhead burden. We only know what we were asked to do and it was not to combine the two.
In fact, the more I think of it, how dare your instructor combine overhead and profit. Overhead is a cost of doing business and should be treated as such. It is money you pay out of your pocket for each and every hour you have a man working. But profit is the reason we do all this. Profit is what builds your business. Profit is what you can split with your partners or give to your kids. Did the bank ever ask how much overhead you pay? No, they want to know your profit. It is a distinctly different part of each job and is too important to be thrown in with overhead like an afterthought.

Sorry for the rant. The best part of this exercise is that we may have gotten some people to re-think how they arrive at a selling price. And yes, the most important thing in business is to know YOUR cost of doing business. You can't sell it if you don't know what it cost you. In this running example we've shown that the correct way to think is from the selling price backwards. And to figure that sell price you have to divide your cost, not multiply.

In our example, if you divide, you arrive at a true profit of $701. If you multiply, your OH is still the same as the divide method (after all, real life doesn't change because you didn't figure it right!) so you end up with a profit of $262. That's a $439 difference! An old friend had a name for this difference...he called it Saturday and Sunday.

Ken_8

Frank Blau

made entirely too much of a fuss, and confused a lot of folks in regard to the natural confusion between "mark-up" and "margin."

Anyone who ever set foot in high school business class knows the difference between these two calculations.

It is my opinion, Frank savored the confusion and used it to his own purpose to confuse and minimize the difference - or understanding of each. He played with the words and calculations ad nauseum - attempting to make us all think we had no idea what the difference was - and/or its influence on profitability.

These two numbers ARE confusing to some of us.

Absolute profitability however is more dependent upon containing expenses and overhead - and the huge profitability impact those factors have, than the confusing prospect of margin or mark-up.

For some strange reason, the greatest proponent of FR, never understood or addressed the most important element of profitability; that being overhead - and the impact therefrom. Oh sure, numbers crunching has its place. But Frank focussed on only one of three vital elements.

I always thought he missed the more important two.

Those being the quality of work - and the "no-cost benefits of referals" that level of work generates, and even more importantly, overhead containment, something I don't believe he ever had a clue about.

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Ken_8

Bingo!

Something Frank had no clue about

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