Job Quote Builder: Method

Cost Build-Up, Markup and Margin, Quantity Breaks and Break-Even

What a quote is made of

A job quote is a job-order cost estimate with a profit on top. Job-order costing (Garrison, Noreen and Brewer, Managerial Accounting, Ch. 3; Horngren, Datar and Rajan, Cost Accounting, Ch. 4) traces direct materials and direct labour to the job from requisitions and time tickets and applies the indirect manufacturing cost (overhead) by a predetermined rate on an allocation base such as direct labour-hours, direct labour dollars or machine-hours. The quote adds what the cost sheet leaves out: the setup and tooling that are paid once per lot, outside services, general and administrative expense, an allowance for estimating risk, and the profit, commission, discount, tax and freight that turn a cost into a price. Money is a plain number in one currency; nothing is converted.

The build-up, per unit at a lot quantity Q

• Material: for each item, gross quantity per unit = net quantity / (1 − scrap fraction), the scrap-factor convention of the APICS Dictionary (a 5 % scrap factor needs 1/0.95 = 1.0526 of the net quantity), times the unit cost.
• Run labour and burden: run hours per unit (or units per hour, written 20/h) at the labour rate and at the burden or machine rate of each operation. The burden rate is the machine's own hourly charge; when the overhead method already covers the machines (a rate per machine-hour), leave it at zero so nothing is counted twice.
• Setup: each operation's setup hours at the same two rates, once per lot, amortized as setup / Q.
• Outside services: subcontract items per unit, and lot charges (minimum lot fees, certifications) as charge / Q.
• Tooling / NRE: fixtures, programming, first-article work, as NRE / Q.
• Direct cost C_dir is the sum of the above.
• Overhead by one of four methods: a percentage of direct labour dollars (the labour rate times the run and setup hours; Yost's 320,000 / 40,000 hours = 8 per direct labour-hour is the same idea on hours), a percentage of the total direct cost, a rate per labour or machine hour on the setup and run hours, or an activity-based table of rates times driver quantities, per unit or per lot.
• G&A as a percentage of the manufacturing cost (direct cost plus overhead), contingency as a percentage of the cost after G&A, and the full cost C_full = C_mfg + G&A + contingency.

Every element is either per unit or per lot and every percentage keeps that split, so the lot cost is linear in the quantity, L(Q) = F + v Q, with F the per-lot (fixed) part and v the per-unit (variable) part. The per-unit full cost C_full(Q) = v + F/Q falls toward v as the lot grows: that is the whole content of a quantity-break schedule.

Markup, margin, commission and discount

A markup m is measured on the cost: profit = m C. A margin g is measured on the price: profit = g P. The same profit is both, with margin = markup / (1 + markup) and markup = margin / (1 − margin): a 25 % markup is a 20 % margin, a 100 % markup a 50 % margin (Garrison, Appendix A, Pricing Products and Services). Quotes often state one and contracts the other; the page prints the conversion and a table.

A sales commission c and a payment-terms discount d (2/10 net 30 gives d = 2 %) are percentages of the price, so they come out of the receipt, not the cost. The quoted price is grossed up so that the net receipt P (1 − c − d) still carries the cost and the profit: P = C (1 + m) / (1 − c − d) for a markup, P = C / (1 − g − c − d) for a margin. The page reports the net margin (profit / price after commission and discount), the gross margin (P − C)/P before them, and the markup actually realized on the full cost. Sales tax applies to the goods subtotal and freight is added below the line; neither carries margin.

Quantity breaks

Each quantity in the list is priced by the same build-up, so the unit price falls with the lot size exactly as the amortized setup, tooling and lot charges fall. The table shows every element per unit at each break, the lot price, tax, freight and total, and the break-even quantity of that break's unit price. The quoted quantity is the one the summary, the break-even, the sensitivity table and the target comparisons use; it is added to the breaks if it is not among them.

Break-even quantity

With the lot cost F + v Q and a unit price P, the net receipt per unit less the variable cost, CM = P (1 − c − d) − v, is the contribution per unit, and the fixed part is recovered after Q_BE = F / CM units (Garrison, Ch. 5: break-even units = fixed costs / contribution margin per unit; the Acoustic Concepts case 35,000 / 100 = 350 is reproduced by the test script as a quote with a 35,000 lot charge). Because the price was built to earn the markup at the quoted quantity, Q_BE is below it whenever the markup is positive; a partial release of the lot at the same unit price is profitable beyond Q_BE and a loss below it. If the net receipt does not exceed v no quantity breaks even.

Sensitivity

The table moves one factor at a time: material unit costs and labour rates by ± 10 %, every scrap percentage by ± 2 points, the markup or margin by ± 5 points. Two readings are given. Re-building the quote with the changed factor shows how the price moves while the margin stays at its target, the quoting view; holding the base price and absorbing the change shows what the margin becomes if the quote has already gone out, the risk view. A labour-rate change moves overhead with it under the labour-based methods, which is why labour is usually the most sensitive line.

Target margin and competitor price

The price for a wanted net margin is P = C_full / (1 − g_want − c − d) at the quoted quantity. For a competitor's or the customer's target price the page reports the profit, net margin and markup it would leave, how far it sits from the quote, and either the cost reduction needed to meet it or the quantity beyond which the fixed charges are still covered at that price. Horngren's Astel case is the inverse problem, target costing: a target price of 800 and a 10 % target operating income leave a target cost of 720; the same 720 with a 12 % cost-plus markup (an 18 % return on 96 million invested over 200,000 units, 86.40 per unit) gives 806.40.

Reading the quote summary

The summary lists every line with its quantity, rate, per-unit and extended amounts: materials at their gross quantities, each operation's labour and machine hours, outside services, tooling, overhead, G&A, contingency, the full cost, then the profit, commission and discount lines that bring the goods to the quoted price, and tax and freight to the total. It is the document the customer sees with the internal lines removed; keep the per-unit column when the customer buys by the piece and the extended column when the order is a lot.

Worked examples on the page

The default case is an illustrative machined bracket (three materials, three operations, anodizing per unit with a lot charge, a 350 fixture, overhead at 150 % of direct labour, 8 % G&A, 3 % contingency, a 25 % net margin with 5 % commission and a 2 % terms discount, 60 freight) at 1, 10, 50 and 250 units; the test script checks it against an independent exact-arithmetic script. The example selector loads three textbook job cost sheets whose printed totals the page reproduces: Yost Precision Machining job 2B47 (Garrison's illustration as printed in Seal, Garrison and Noreen, Exhibit 3.4: direct materials 1,404, direct labour 27 hours 180, overhead 27 × 8 = 216, total 1,800, 900 a unit for the two couplings, sold at cost), Robinson Company job WPP 298 (Horngren: 4,606 + 1,579 + 88 × 40 = 9,705, revenue 15,000, gross margin 5,295) and the Astel Provalue cost-plus price (12 % on 720 = 806.40).

Limits of the tool

• Costs are linear in the quantity: no learning curve on the run hours (the Cost Estimating tool has one), no price breaks on purchased material, no overtime or capacity limits.
• One overhead pool and one G&A rate; a plant with departmental rates should enter each department's overhead as burden on its operations or use the activity table.
• Scrap is a material yield only; it does not add run time for the scrapped pieces.
• Commission and discount are taken as always paid; a discount the customer does not take is extra margin.
• The profit lines are before income tax and before the cost of capital tied up in the job.