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The minimum sustainable price

Full cost at a declared volume, with the five assumptions that make it a number at all — and what a missed volume does to it.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will build a minimum sustainable price from materials, owner labor at a costing rate and a share of the period's indirect cost, and you will state the five assumptions it rests on: the volume and its period, the capacity, the allocation method, the tax treatment and jurisdiction, and which sense of owner pay is included. You will also give the band of prices a range of volumes produces, and work out what happens when the volume assumed does not arrive.

2. What you already have

Every piece of this is a lesson you have already done: direct cost, owner labor at a rate, an allocated share of overhead, and break-even at a volume. What is new is putting them together into one floor under the price, and the discipline of saying what that floor rests on. A minimum price without its assumptions is the most common way small businesses fool themselves, because it looks precise and it is not.

3. Words this lesson uses

4. A number that does not exist without its assumptions

$$\text{minimum sustainable price} = \text{direct material} + \text{labor at the costing rate} + \frac{\text{indirect cost for the period}}{\text{volume assumed}}$$

There is no minimum sustainable price without its assumptions, and there are five of them: the volume assumed and over what period; the capacity available, and whether that volume fits inside it; the method the indirect cost was spread by, and over what base; the taxes included or excluded, and where; and the owner compensation included, in which of the three senses. Leave one out and the number is not determined — several different figures would each be defensible, and the one you wrote down is whichever the arithmetic happened to reach.

The third term is where the trouble lives. It has the volume in its denominator, so the answer moves whenever the guess about volume moves — and a price quoted without that guess attached is a number nobody can check.

This is how to work the number out and read it, not a recommendation about what to charge. What any particular business should do depends on a market nobody here can see, and on rules that differ from place to place.

5. The method, step by step, and how to check it

State the volume first, and check it against capacity. Choose the volume you honestly expect to sell over a normal period, not the most the business could make. Write it down with its period: 300 mugs a month. Then check it fits: a volume above capacity gives a price the business cannot deliver.

Add materials and labor. Both come from earlier lessons: materials corrected for waste, labor as the unit's minutes turned into hours at the costing rate. These two lines do not depend on the volume.

Add the indirect share. The period's indirect cost divided by the volume assumed, using the method you chose. This is the line that moves when the volume moves.

State the other assumptions. The method you spread by, whether sales tax is included and under which place's rules, and which sense of owner pay is in the figure. Without them, a reader cannot tell what the number means.

Check it three ways. Multiply the indirect share by the volume: you should get the period's indirect cost back. Work the price out again at half the volume: if it barely moves, the indirect share is small and the volume assumption matters little; if it jumps, the volume is the assumption to watch. And compare with what similar businesses charge: a floor far above the market is information about the offer or the costs, not a reason to ignore the floor. Keep the working with the price, so the next review starts from it rather than from memory.

6. Why the volume is the assumption that matters most

Of the five assumptions, the volume usually moves the answer most, because it sits in a denominator. Halve the volume and the indirect share doubles; the materials and labor do not change at all. For a business with large fixed costs and small variable ones — a studio with an expensive kiln, a gym, a salon — the minimum price can be several times higher in a quiet month than in a busy one.

That creates a trap. The owner sets the price on an optimistic volume, the volume does not arrive, and the month is short by exactly the part of the indirect cost the missing units would have carried. Nothing in the price looked wrong, which is why the shortfall is so hard to trace. The defense is to state the volume beside the price, compare actual volume with it each month, and treat a persistent gap as a reason to revisit the price or the costs, not as bad luck.

A useful habit is to work out the price at two volumes — the one expected and a cautious one — and to know which of them the current price is based on. Many owners find it steadying to price on the cautious volume: then an ordinary month leaves a little over, and only a bad one lands on the floor.

7. Floor, not price

The minimum sustainable price is a floor. It says the business cannot go below this figure for long without running something down. It does not say what to charge. The actual price depends on what the offer is worth to the customer and on what the alternatives cost them, and it is often well above the floor.

The gap between the price and the floor is the profit that pays for growth, for a bad month, for replacing equipment, and for the owner's return beyond the costing rate. A business priced exactly at its floor survives only while every assumption holds. And a floor above what any customer will pay is not a pricing problem: it says the offer, the costs or the volume need to change before the business can work at all.

Each of those three can be changed. The offer can be made worth more — a faster turnaround, a guarantee, a product that suits a customer who values it. The costs can be cut — a cheaper supplier, less waste, fewer minutes on each unit. The volume can be raised — a new channel, a regular order, a second product that shares the same fixed costs. The minimum sustainable price tells the owner which of the three is furthest out of line, and so where the effort is most worth spending before the price itself is touched.

8. In the world: a yoga studio's class price

A yoga teacher rents a studio for 1,400 dollars a month and pays 160 for insurance and booking software: 1,560 of indirect cost. She runs 16 classes a week, about 64 a month, and each room holds 14 people. Mats are cleaned and replaced at about 1 dollar per attendee. She costs her own time at 40 dollars an hour and each class takes 1.25 hours including setting up, which is 50 dollars a class, or 50 divided by the attendees per person.

At an average of 10 people a class, she sells 640 places a month. The indirect share is 1,560 ÷ 640 ≈ 2.44 a place, her labor is 50 ÷ 10 = 5 a place, and the consumables are 1: a minimum sustainable price of about 8.44 a place, before sales tax, with her time as a costing input. At an average of 6 people a class — 384 places — the same arithmetic gives 1,560 ÷ 384 ≈ 4.06, plus 50 ÷ 6 ≈ 8.33, plus 1: about 13.39.

She charges 15 a class. At 10 people she is well above the floor; at 6 she is only just above it, with almost nothing to cover a quiet August or a new set of mats. The calculation tells her that her real risk is not the price but the attendance, so she spends her effort on filling the weekday morning classes rather than on a price rise that might empty them.

9. In the world: why governments ask for cost assumptions

Public contracts for services such as school transport or home care often ask bidders to show the volume, staffing and overhead assumptions behind their price. The reason is the one in this lesson: a price without its assumptions cannot be compared or checked, and a bid built on an unrealistic volume tends to fail halfway through the contract.

10. Where this goes wrong

Quoting the price without the volume. The commonest failure in the subject. My minimum is 12 dollars is not a claim anybody can check or act on.

Assuming capacity. Plan at what you expect to sell, not at what the kiln could fire. Pricing at capacity volume gives the lowest number the arithmetic can produce and the one least likely to happen.

Leaving the owner out. Then the minimum sustainable price is sustainable for the business and not for the person, and the shortfall is invisible until the person is exhausted.

Mistaking it for the price. It is a floor. What to charge depends on what the offer is worth to a customer, and this course does not tell you that. A floor above what anybody will pay is information about the offer.

Tax. Say whether the figure includes it and under which jurisdiction's rules. Rules differ by place and change over time, and the only honest general statement is that you have to check the ones where you trade.

11. A mug at 300 a month

1. State the volume and check it against the capacity of 360.

   $300 \le 360$

   The volume fits, so the price can be delivered.

2. Write the materials.

   $\text{materials} = 2$

   Clay and glaze in one mug.

3. Cost 15 minutes of the owner's time at 24 an hour.

   $0.25 \times 24 = 6$

   The owner's time as a costing input.

4. Find the indirect share of 1200 over 300 mugs.

   $1200 \div 300 = 4$

   The line that depends on the volume.

5. Add the three lines and state the assumptions.

   $2 + 6 + 4 = 12 \text{ at 300 a month, equal spread, tax on top}$

   The number with its assumptions is a claim someone can check.

12. A clean, priced properly

1. State the volume and capacity.

   $40 \text{ cleans a month} \le 50$

   Assumptions one and two.

2. Write the materials.

   $\text{materials} = 3$

   Supplies used on one clean.

3. Cost two hours at her costing rate of 24.

   $2 \times 24 = 48$

   Owner labor as a costing input: assumption five.

4. Spread the 760 of monthly indirect cost equally over the 40 cleans.

   $760 \div 40 = 19$

   Assumption three: the method.

5. Add the three lines.

   $3 + 48 + 19 = 70$

   The minimum sustainable price at 40 cleans.

6. State the tax treatment.

   $70 \text{ excluding sales tax, added where she trades}$

   Assumption four; all five are now said.

13. The same clean, at 20 a month

1. Keep materials and labor.

   $3 + 48 = 51$

   These scale with the cleans, so they are the same per clean.

2. Spread the 760 over 20 cleans.

   $760 \div 20 = 38$

   The indirect share doubles.

3. Add the lines.

   $51 + 38 = 89$

   The minimum price at 20 cleans.

4. Compare with the price at 40.

   $(89 - 70) \div 70 \approx 27\%$

   Nothing about the work changed; the volume did all of it.

5. Find what she collects if she charges 70 and books 20.

   $20 \times 19 = 380$

   Each clean carries the share set at 40 cleans.

6. Find the month's shortfall.

   $760 - 380 = 380$

   Half the indirect cost goes uncollected.

7. Say what the shortfall is.

   $\text{a failed volume assumption, not a wrong price}$

   A stated assumption is a stated risk, and can be watched.

14. Your turn: 200 crates a month, 600 of indirect cost

1. Materials are 18 and handling is 4 a crate. Find the indirect share at 200.

   $600 \div 200 = 3$

   Divide by the volume.

2. Add the three lines.

   $18 + 4 + 3 = 25$

   The minimum sustainable price at 200 crates.

3. Your turn: work this step out. Its working is at the end of the packet.

   Find the price at 100 crates.

15. Guided practice

Monica's Market Stall says: *the minimum I can charge for a crate of mangoes is $25$ dollars. That is the month's indirect cost spread equally over every crate sold, sales tax excluded, and added on top at whatever rate applies where she trades, and the owner's time included as a costing input at 20 dollars an hour. I can make $240$ a month.* Which of the five assumptions has been left out?

• The expected sales quantity for the stated time span
• The method the indirect cost was spread by
• Nothing — the capacity of $240$ a month covers the volume
• Nothing — a cost-based price needs no assumptions at all

16. Guided practice

Complete the worked solution: a unit uses $8$ dollars of materials and $15$ minutes of the owner's time, costed at $20$ dollars an hour. The month's indirect cost is $640$ dollars, spread equally over a planned $128$ units. What is the minimum sustainable price at that volume?

1. Cost the labor in one unit.

   $15 \div 60 \times 20 =$ _l

   Minutes to hours, then the costing rate.

2. Find the indirect share at the planned volume.

   $640 \div 128 =$ _o

   The month's indirect cost over the volume assumed.

3. Add the three lines.

   $8 + (\text{labor}) + (\text{share}) =$ _p

   The full cost at that volume is the floor.

4. Find the indirect share at half the volume.

   $640 \div 64 = 10$

   Half the units carry the same monthly cost.

5. State the price with its volume.

   $(\text{price}) \text{ at } 128 \text{ a month}$

   The figure means nothing without the volume beside it.

17. Guided practice

Northside Repairs: materials $12$ dollars a screen replacement, $45$ minutes each at $28$ dollars an hour, $1360$ dollars of indirect cost in the month, the month's indirect cost spread equally over every repair taken, and a planned volume of $80$ a month inside a capacity of $100$. Taxes: sales tax excluded, and added on top at whatever rate applies where he trades. Owner pay: the owner's time included as a costing input at 28 dollars an hour. What is the minimum sustainable price, in dollars?

Answer:

18. Practice

Bright Home Cleaning is not sure whether it will sell $40$ standard cleans a month or only half that. Both are possible. Give the band of minimum sustainable prices that range of volumes produces, in dollars.

This task has no paper form; do it on a device.

19. Practice

Neighborhood Kitchen prices at exactly $7.5$ dollars, the minimum sustainable price at $600$ lunch boxes a month, with $1800$ dollars of indirect cost. The month comes in at half that volume. How many dollars of the month's indirect cost go uncollected?

Answer:

20. Practice

Neighborhood Kitchen plans on $600$ lunch boxes a month against a capacity of $720$. Materials are $2.5$ dollars a unit, each takes $6$ minutes at $20$ dollars an hour, and the month's indirect cost is $1800$, with the month's indirect cost spread equally over every box made. Taxes: sales tax excluded, and added on top at whatever rate applies where she trades. Owner pay: the owner's time included as a costing input at 20 dollars an hour. Build the minimum sustainable price, in dollars.

21. Somewhere new

A dog groomer plans $67$ appointments a month, inside a capacity of 100. Shampoo and consumables are $10$ dollars each, an appointment takes 45 minutes, and she costs her own time at $28$ dollars an hour as a costing input — she is a sole proprietor, so no wage appears in her accounts. Her van, insurance and pitch cost $335$ dollars a month, spread equally over every appointment. Sales tax is excluded and added on top at whatever rate applies where she trades. What is her minimum sustainable price at that volume, in dollars?

22. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

23. Test question

Bright Home Cleaning plans on $40$ standard cleans a month against a capacity of $50$. Materials are $3$ dollars a unit, each takes $120$ minutes at $24$ dollars an hour, and the month's indirect cost is $760$, with the month's indirect cost spread equally over every clean booked. Taxes: sales tax excluded, and added on top at whatever rate applies where she trades. Owner pay: the owner's time included as a costing input at 24 dollars an hour. Build the minimum sustainable price, in dollars.

24. What you can do now

You can build a minimum sustainable price, name all five of its assumptions, and say what a quiet month does to it. Tell someone why the same business honestly has two different minimum prices. Next: costing a single job for one customer, and writing the quote for it.

Working for the steps left to you

14. Your turn: 200 crates a month, 600 of indirect cost, step 3