Factory cost price

The integral cost price equals the factory cost price plus the return on investment (ROI) of 20%. 

The factory cost price equals the out-of-pocket (OOP) price plus depreciation. 

Factory cost price ROI (20% of investment) Integral cost price... 

The cost of the purchased equipment is used as the basis of the factorial method of cost estimation and must be determined as accurately as possible. It should preferably be based on recent prices paid for similar equipment. 

A similar model is provided by what is called Ramsey pricing, after the economist Frank Ramsey.1213 This author showed that if the above conditions for market segmentation are fulfilled, social welfare is maximized in a particular market when the profit margin that is added to the marginal cost of production in order to determine the ex-factory price is inversely proportional to the price elasticity of demand. In other words, the price is always fixed above the marginal cost in order to recover the sunk costs, but this margin is inversely proportional to the sensitivity of demand in that market. Formally, this can be expressed as follows ... 

However, the pressure to keep down the costs of all parts used in domestic appliances is omnipresent and also applies to the area of sensors and microsystems. The lifetime of sensors, sometimes under adverse conditions, is critical, and a lifespan between 8 and 15 years should be expected. Commercially viable prices for sensing modules are rather low, depending on the individual functions, but less than 5 Euro for a complete module are typical [1]. Also the financial risk involved in serial production has to be considered. Just one faulty unit would cost the producer nearly 100 Euro to repair, even if this unit costs only 2 Euro. If the factory output is 2000 units per day, the loss may amount to 20 million Euro if a flaw is detected by one of the customers after 100 days of production. 

Given, then, the production rate and sales price, the total revenue for the project can be calculated (perhaps with allowance made for under-running in the first year or two as the faults are dealt with). It will cost money to get the product to market a sales force, advertising, cost of shipment and distribution, and so on. There may also be a royalty on sales payable to the owner of the technology used in the plant. These costs, generally called selling costs, are subtracted from the revenues to derive the sum that actually gets back to the project - the factory netback . 

A detailed consideration of the cost aspect is beyond the scope of this book but it is vitally important. Factory space and plant cost money in rent and maintenance so that, the longer they are occupied in producing a given number of items, the higher is the cost of each. The number of people involved in a process, especially if they are skilled, often accounts for a major part of the cost. The price of raw materials may only contribute a small fraction to the ultimate cost but must be kept to a minimum. An unnecessarily close specification for purity, dimensional tolerances etc. may result in a large increase in price. 

Promising experiments have been done to produce protein flour or protein isolates from safflower meal. The USDA compared safflower protein isolate with isolate from soy and found the safflower product to be quite useful. The study also outlined the cost of investment and production for the process envisioned (128-130). Other researchers have written extensively on this subject (131-134). A factory would need considerably more than the total U.S. supply of safflower meal to produce an economically viable protein isolate. Unless a scientific breakthrough can materially reduce the hull portion of a safflower seed while retaining satisfactory yields, meal will continue to sell for a modest price and to be considered a second-rank product. NIOP Rules 8.1.1-8.1.3 established the factors guiding the trade in safflower meal. 

On the other hand the pricing policy negatively affects them with a system of maximum ex-factory prices. The prices for domestic producers are strictly limited (entitled costs plus 30 percent gross profit) for imported drugs. They are established by negotiations. Generally the proposed price is accepted. A lack of resourses for research and development by the domestic manufacturers has resulted from this situation. 

---