How to Estimate the Cost of Manufacturing a Product

It is very exciting to have a bright new idea for a product with a ton of applications. It’s even better if you can make money from it. But the process of getting through the design, budgeting, procuring raw materials and production stages can be daunting if you are not well prepared.

In this post, we will take you through that process. Keep in mind though that you can save money, time and a lot of stress as well as dramatically shortening the process and learning curve by seeking guidance and help from a company that specializes in manufacturing (like us here at J – CAD!).

The very first step after having a great idea is to design the product. For instance, if you want to make a new type of speakers, you will need to design the look and feel of the product including understanding the raw materials you are going to use. Since we are in the 21st century, we use computer-aided design (CAD) to create a product mock up.

Factoring in Costs For Computer Aided Design

To begin with, we need to create a 2D or 3D model of your product using a user-friendly CAD program that allows us to easily make changes to the design if we need to. A CAD design is basically a highly accurate computer simulation / model of your product idea.

In the past, CAD design software was used to analyze physical qualities of a project, like estimating how much heat and pressure a product could withstand or measuring the thickness and toughness of a product. You can do the same manually using geometric and numeric values of the design but why would you when it’s so much easier using a computer to do the calculations for you. Today, you can also get an estimated cost by analyzing the parameters of your digital model. That means you don’t have to wait until you have a physical prototype to make a budget estimate for producing anything from a single unit to many thousands or hundreds of thousands.

The cost of estimation with some software is literally as simple as this:

• We either design the CAD file for you, or if you already have a CAD file (in which case you don’t have to factor CAD design into the cost) we can import the file into our CAD programs.
• Create a price list with details like a description of the required materials, unit of measurement and unit price. You can also import a reference price book if you have one.
• Then we return to the CAD drawing and match each part of the product with its corresponding price and define the measurements.

For example, if you are costing the outer material of a speaker casing, define the area that the fabric covers in the measuring system you are following (cm/m/in etc).

We can do this for each part or the whole product. The ‘bill of quantities’ will give you a final tabulation of what materials you need and how much money it will take to manufacture one unit. This is incredibly useful information when you get to the next stage: prototyping, although fairly complicated for beginners to implement and understand. This is where enlisting the help of a manufacturing company comes in. We have experience with many different types of projects in many different industries. Based on previous projects we can give you an estimated cost, and then when we have a CAD design for your project we can do all the heavy lifting for you in terms of getting an accurate quote for mass production.

It’s also important to factor in economies of scale, which can be hard to understand and predict if you’re not doing this all day every day. Although more relevant for smaller production runs, the cost of the CAD design also needs to be factored into the overall per unit price, by dividing the cost for the design by the number of units you are planning to produce. This is also true for any prototyping costs as we’ll see in the next section.

Prototyping and Costs

The first step of physically manufacturing a product that has only been available as a design in your head and then on the computer up until this point is prototyping. Prototyping is the process of making a sample of your product. Because prototypes are one-off samples, they cost more to produce than your unit price will when manufacturing in bulk, but they can save you untold amounts of money in the process.

Imagine for a moment if you went ahead with mass producing a part that had a critical structural fault in it. You may waste an entire production run, effectively doubling your per unit cost, as you would need to re-do the whole production run with the structural issue resolved. Prototypes allow you to uncover these sorts of issues early on in the process. It may seem like a waste of money to create one of more iterations of prototypes, but it can potentially save you a large amount in the long run.

Part of the prototyping cost can include having engineers review your prototype to tell you what’s working and what’s not so that you can make changes until it is perfect for full production. Remember that if you miss or forgo this step you might try and mass produce a product which is not physically sound, viable or fit for purpose.

Formula For Estimating the Cost Per Unit When Producing Items in Bulk

Whether you want to make 10 mugs or 10,000 engine parts, to calculate the total manufacturing cost, you must know how much it costs to make one unit. Total cost is calculated by adding all the resources required to make one finished unit including materials, labor charges and overheads, minus discounts that can be applied for economies of scale.

To keep it simple for now however, the basic formula assuming no discounts for large scale production is:

Materials (for prototypes and the finished product itself) + labor (CAD design, wages for factory staff) + overheads (factory rent, equipment purchase and upkeep etc.) = Total manufacturing cost

What Do Material Costs For Production Include?

Direct materials are basically the cost of the inventory, eg. the raw materials used in the manufacturing process minus any materials leftover at the end if they can be re-used in other production processes.

For example, if you spend $10 for the inventory and you are left with $2 worth of excess material at the end of the process that can be re-used or sold back to the factory your unit cost for materials is: $8

What Labor Costs Are Involved in Manufacturing a Product?

Then there is direct labor cost which is this instance are the wages and payroll taxes of the people running the factory where your product is made, the CAD designers who design your product, the project manager who makes all the moving parts work together etc. This may be worked out at a daily or hourly rate depending on the kind of labor you employ. In that case, you also need to calculate units made per hour or day.

What Are Manufacturing Overhead / Indirect Costs?

Finally, there will be overhead costs which are over and above what you need to produce the product. Things like factory rent, maintenance, depreciation of equipment, etc. all fall in this category. Sometimes, these are also referred to as indirect costs.

With their powers combined…

All of these factors combine to calculate your total cost per unit, and will be factored together into a cost when getting an estimate on your project from a manufacturer. If the estimated cost is beyond your budget, there are ways to reduce your unit cost including for example:

• Using cheaper materials or getting creative with production waste
• Increasing the unit quantity. Efficiencies of scale generally mean that the more units you buy the less each of them cost
• Making use of cost of living differences to choose where you manufacture. Manufacturing in China for instance is much cheaper than manufacturing locally (but can still be the same quality)

Wrapping Up

If all of the above information seems overwhelming and makes you want to give up, don’t!

If you’d like a ballpark figure of how much your project is likely to cost, give us a call on 1-888-202-2052 or fill out our quote request form and we’ll get back to you asap. We can even explain the process and how all the costing is worked out if you’d like.

We look forward to speaking with you!

Further reading: What manufacturing industry types are there?