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    « Selling Uptime | Main | Equipment Unit Cost Tool »

    April 03, 2007

    Unit Cost of Equipment

    Many reprographers are good at calculating their unit cost.  Those who have a good handle on their unit cost can determine how to best price their products to maximize their profit, but my observation is that not enough attention is paid to the unit cost of equipment.  By the "unit cost of equipment" I mean the cost of the asset versus the cost to operate the asset.  It is fairly easy to calculate the unit cost of paper, toner and service, but calculating the cost of equipment is a little different.

    Many people will say the cost of equipment is zero because my equipment is fully depreciated.  Depreciation is an accounting method to spread the expense of equipment over its useful life.  It is an approximation!  Most accountants will use a straight line depreciation over 3 to 5 years, but the most accurate form of depreciation would be "activity depreciation".  Instead of depreciating a certain amount every year or month you depreciate it for every unit produced on the equipment (based on the expected life of the equipment in units).  In the case of reprographics it would be a depreciation per unit printed (square foot or square meters).  This method can be complicated to administer so most accountants use straight line depreciation.  It is important to recognize that depreciation can cloud what your actual unit cost is.

    Depreciation methods aside, the simplest way to determine your unit cost is with this simple formula.

    Truecost2_3

    Purchase Price - What you pay for the equipment, or for existing equipment what is the market value.

    Salvage Value - At the end of the useful life how much can you sell the equipment for.

    Useful Life - How long will the equipment be used in months or years? (This is highly correlated with the Periodic Volume)

    Periodic Volume - How much volume per period (months or years) do you put on the equipment.

    This formula will give you an estimate on a unit (sqft or sqm) basis what the cost of the equipment is.  Below is an example.

    Truecost3_2

    If you want to try this yourself or compare two scenarios the following post contains an on-line tool to do some "what if" scenarios of your own.

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