Step By Step Invention Cost-1

It’s vital that you construct an accurate and comprehensive cost analysis of your new item.  It should include every aspect of production and logistics until the product is sitting packaged, ready to ship. Consider everything including:

Components  •   Product  •  Freight  •  Customs Duty  •  Brokerage  •  Packaging

Initially there will be blank areas that can only be addressed when you have located a potential manufacturer, broker or sub vendor etc. Of course you need to compile a list (or make a budget for) of all the other expenses that will be incurred in getting your product made.  These include:

Drawings/engineering  •  Samples  •  Patent services & applications  • Tooling

In some cases of large initial expense such as tooling, the cost can be amortized over several production runs of the item.

Currency risk: Be sure to account for possible currency exchange risk when making your price calculations. The following is an extreme example of how the best laid plans can go horribly wrong. But I actually experienced it when I was first starting Tool Logic:  We were having our products made in Japan so we had to pay for them in Japanese Yen.  We estimated the cost based on an exchange rate of Yen 110 = $1.  I had been monitoring the Yen/$ exchange rate for several years.  As I recall, it had been as low as Yen 120=$1, but not below Yen 110=$1 and seemed to be in a stable range.    So I set Yen 110=$1 as the high end of the range for exchange rate fluctuation.  Eight months later, we were in production and obligated to pay for product, but the exchange rate had soared to Yen 85 = $1.  A 22% increase in our base cost!  So the profitability of the item had been virtually destroyed.  Oh well!  The suggested retail price had been set and advertised, so it could not be changed.  We just had to ride it out.  Fortunately with some creative financial scrambling we were able to wait the situation out.  Eventually the exchange rate returned to Yen110 and even went as low as Yen145=$1.  So it all balanced out in the end, but it was a painful learning experience when it happened.