Pricing From Break Even Analysis

Business By cakeandpartygirl Updated 3 Jul 2010 , 3:10am by cakeandpartygirl

cakeandpartygirl Posted 2 Jul 2010 , 11:48pm
post #1 of 11

This may seem like a stupid question but I am totally stumped. I have always priced my cakes based upon the costs of ingredients and my time. I have never had a need to be concerned with renting a building and all the additional costs that incur with it. My question is that based upon your break even analysis and your ingredient costs how much do you add on to your cakes?

For example a 8 inch cake costs me to make between 15-20 including boards and boxes. I have in the past charged 40 icon_redface.gifthumbsdown.gif (but before you start slinging icing at me and beating me with a spatula) that's a different discussion and I will be changing it (putting my big girl panties FINALLY). My hypothetical break even analysis says that I will need 6500 in volume per month to break even.

I hope that I am asking this question correctly.

10 replies
sugarandstuff Posted 2 Jul 2010 , 11:59pm
post #2 of 11

Where is the $6500 coming from if you do not have to pay for a rental space? I'm confused - but it may just be me, rough day icon_smile.gif

Kitagrl Posted 3 Jul 2010 , 12:02am
post #3 of 11

I work from home but I price according to MOSTLY my time....I use comparitive pricing, loosely, with other cake artists in my area. Not identical pricing, but same general ballpark with others with my same abilities.

Then, as I do the cakes, I loosely check them to see what my hourly "wage" would be, and then of course I keep my monthly profits and expenses and all that.

I guess I'm saying...I don't START my pricing based on cost. I start my pricing by what others of my same ability charge in the shops (sort of) and what I think I deserve for the cakes....and then I double check that with my expenses to make sure I'm charging enough. I think, if you do it THAT way, you will actually make more money than if you start with expenses and work up.

For instance my BASE price here is $3/serving....so that raises your $40 cake to $60 immediately.

indydebi Posted 3 Jul 2010 , 1:16am
post #4 of 11

That 6500 number is assuming that the ONLY cakes you make will be 8" rounds at $40 each.

My CPA gave me a spreadsheet that lists all of my (fixed) expenses and a projected (what I want to make) profit margin. The spreadsheet then calculates how much money I have to make to meet these expenses and profit margins.

Flipping back to an old one, one month showed I had to make $7200 in sales. Now whether that is 72 cakes for $100 each or 8 cakes of $1000 each or 3 caterings of $2400 each doesn't matter .... as long as the grand total comes to $7200 for that month.

With this spreadsheet, I can change my advertising amount or my payroll amount or my rent amount and my break-even amount will automatically calculate and change.

indydebi Posted 3 Jul 2010 , 1:19am
post #5 of 11

In re-reading, I may have mis-read your post. Is the 6500 the number of $40 cakes or the dollar volume you have to meet?

My post still stands as to how my break even chart works, but depending on if "6500" is cakes or dollars may make a difference in how you read my response. icon_redface.gif

Kitagrl Posted 3 Jul 2010 , 1:22am
post #6 of 11

I thought she meant $6500 total for the month...

Which would mean if she raises prices on her cakes (if the local cost of living allows) she can make fewer cakes for the same money...

cakeandpartygirl Posted 3 Jul 2010 , 2:04am
post #7 of 11

I am sorry I wasn't informed that I was getting any responses. I was saying that in the past I sold my cakes without having to think about rent but if I were to open up a shop the break even point would be $6500. It doesn't matter how many $40 dollar cakes I just used that as an example.

When I said about not needing to worry about rental costs. I worked out of my home and so rental costs weren't a factor in determining pricing.

The average costs of cakes in my area is between 1.75 and 3.00 per serving.

indydebi Posted 3 Jul 2010 , 2:21am
post #8 of 11
Quote:
Originally Posted by cakeandpartygirl

I have always priced my cakes based upon the costs of ingredients and my time.



Welcome to the "real" world of retail business. From my time on here, this is a normal revelation to those who move from home to shop, so you are right on schedule and very normal! thumbs_up.gif

Selling price is a mathematical combination of cost of ingredients (COGS) + labor (your or your employee's time PLUS applicable payroll taxes) + fixed costs and overhead.

Too many times I see CC'ers figuring price based on COGS plus "a little extra for me", with no regard for actual costs (fixed/overhead). Which is understandable because they are not actually writing a check for that separate electric bill that is dedicated to their baking; or not actually writing a check for the separate auto policy that covers a 'commercial' use vehicle. And it's easy not to really count the printer ink cartridges, the paper, the paperclips, the ink pens and other stuff that are just laying around the house and not bought specifically for 'the business'.

But once you get a shop and you have separate and specific bills to pay, then and ONLY then do many people realize the REAL cost of doing business and making that cake.

One way I calculated it was to figure how many servings of cake I'd be making a week, then calculating that out to how much a month. For example, if I project 2 weddings a weekend at 150 servings per cake, that's 300 servings a week x 4 = 1200 servings a month. Take tht times my $3/serving = $3600 a month. If my fixed cost/break even point is $7200, then I know I ALSO need either another 3600 servings or (in my case) I better do at least one catering a month of 200 people at $18/person. Or I need to do 1200 cookies at $3/each, which breaks down to 300 cookies a week or 60 cookies per day (5 dozen per day).

You start with your fixed costs then figure what combination of sales you need to do to meet those costs. Then look at it and ask "Is this do-able?"

Kitagrl Posted 3 Jul 2010 , 2:39am
post #9 of 11

Indy its surprising...because like if I just figure one cake...say I charge $300 and my shopping list for that particular cake is only like $50...I feel like I "made" $250.

But at the end of the month, after taking out some gas money and EZPass for deliveries and GSA and Oasis orders and ingredients and insurance money and equipment that breaks and has to be replaced or fixed and cutters or pans or etc...my profit is NOT NOT NOT $250 for that cake!!!!!!

My profit margin is much higher than a bakeries, from home...but then my volume is much less so I think it kinda evens out, roughly.

cakeandpartygirl Posted 3 Jul 2010 , 2:43am
post #10 of 11

Oh yeah kitagirl that so used to be me but I have been reviewing my costs of ingredients and I am seeing that I wasn't making any money especially since some of my ingredient costs have increased and especially since I want to have a store.

cakeandpartygirl Posted 3 Jul 2010 , 3:10am
post #11 of 11

Thanks everyone. I am going to continue crunching numbers!! How fun icon_smile.gif

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