One question people often have is, how much does it cost to manufacture something? If you’re talking about getting something made by a contract manufacturer (CM), of course, you can just get quotes from several companies and go from there. But if you’re making something yourself you’ll want to figure out what your manufacturing cost is. And even if you’re planning on working with a CM, it can be useful to know how they arrive at their manufacturing cost estimates.
So let’s look at how you actually do the calculations to determine the cost to manufacture something. We’ll use the familiar example of 3D Printing a plastic sculpture.
In the most theoretical model, manufacturing cost is shown by this equation:
Total Cost = (Equipment cost) + (Tooling cost) + (Material cost) + (Overhead cost)
Equipment Cost – The cost to buy the machine that will make the parts. In our example, this would be the 3D Printer. Let’s say the one we want to buy costs $1000. How much will that be per part? The way we handle this is to spread the cost of the equipment over a certain amount of time that we think we’ll end up using it, and figure out how many parts we could make in that amount of time. Let’s say our sculpture takes 2 hours to print, and we have the 3D Printer running 10 hours per day on average, for 360 days/year. Let’s also say that we plan to keep this printer for 2 years. I’ve broken this calculation into steps to make it a little clearer.
($1000/printer)*(1 printer/2 years) = $500/year to own the printer.
(10 hours/day)*(1 sculpture/2 hours) = 5 sculptures/day
(5 Sculptures/day) * (360 days/year) = 1800 sculptures/year
E = ($500/year)*(1 year/1800 Sculptures) = $0.27/sculpture
Tooling Cost – The cost of the specific item used only to make your part. (In 3D Printing there is no tooling cost. But just so you have an example, in the case of injection-molding this would be the cost of the actual mold.) T = $0.
Material Cost – The cost of the plastic filament that we’ll use to make our sculpture. Let’s say we’ve chosen a material that costs $35.00 for a 1kg spool and let’s assume that we use 100g. of material (including the amount that we use to make the support structures) for each sculpture.
M = ($35/kg)*(0.1kg/part) = $3.50 per part
Overhead Cost – The cost of keeping your business running. (Rent, electricity, etc.) In a “textbook” case, labor is usually rolled into overhead cost, on the assumption that your employees work a set number of hours per week and get paid a set amount per hour regardless of what they’re doing. (This may or may not be true in your business.)
Overhead is often the one that will be trickiest to nail down in real life. But let’s say we look back at our bookkeeping records for the year (which of course we have been keeping very diligently so that we are not scrambling to straighten everything out right before taxes are due!) and we calculate this number to be $200 per hour. As we said above, our piece takes 2 hours to print.
O = ($200/hour)*(2 hours/part) = $400/ part
So, we find that each sculpture costs
$0.27 + $0 + $3.50 + $400 = $43.77
Now, obviously, we’ll find it pretty difficult to sell a 3D-printed plastic sculpture for more than $400, which we would need to do to make any money.
So where’s the problem here? Well, you’ll see that the largest number by far is the overhead, at $400 per part. But to get that number we assumed that 100% of our overhead cost is going to only make this one product. (We have a physical space of some sort where there’s an employee being paid by the hour only to run the 3D printer, and neither the employee nor space are used to produce anything else we can sell.)
In reality, you almost certainly would not set up your business this way! You’d either have many printers with the same employee running all of them (which you could easily do without hiring more employees since the vast majority of the time, the printer is running on its own, and without dramatically increasing your rent or other overhead costs since 3D printers are fairly small,) or you’d have other pieces of equipment such that your employee and space costs would be divided among several products.
Also, you can see one of the reasons that 3D-Printing is not usually the method of choice for high-volume production: in the same 2 hours that it takes to 3D-Print one sculpture, you could injection-mold many sculptures.
Weekly Challenge:
Collect as much of this data as you can for your business, and run this calculation for yourself. Were you surprised by what you found? Comment below!
