Is this order worth accepting at this price?
A quote can look healthy on price minus material and still lose money once setup, commission, freight and the time you wait to be paid are counted. This shows the margin that is left and the lowest price that meets your target.
Your assumptions
Worked-example values — replace with yoursVariable costs only; shared overhead is not allocated.
This is an estimate. Check it on your own data.
One quote is a decision; a year of quotes is a pattern. Comparing what you quoted with what you won and what you kept is what a workspace does on your own data.
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The formula
- order value = quantity × price
- cost of waiting = order value × (payment days ÷ 365) × cost of capital
- margin = order value × (1 − freight and commission %) − quantity × variable cost − setup − cost of waiting
- lowest price = (quantity × variable cost + setup) ÷ (quantity × (1 − freight % − cost of waiting % − target %))
Worked example · the values pre-filled above
Quantity quoted: 500 units · Quoted price: $120 per unit · Variable cost: $78 per unit · Setup, tooling and one-off costs: $2,000 · Freight absorbed and sales commission: 3 % of order value · Payment terms: 45 days · Your cost of capital: 8 % a year · Target margin after all of the above: 25 % of order value
- Order value = 500 × $120 = $60,000. Freight and commission 3% = $1,800.
- Cost of waiting = $60,000 × (45 ÷ 365) × 8% = $592.
- Margin = $60,000 − $1,800 − 500 × $78 ($39,000) − $2,000 setup − $592 = $16,608, which is 27.7% of the order.
- Against a 25% target the order clears; the lowest price that still meets 25% is about $115.47 a unit.
Result: 27.7% margin · accept
What this assumes
- Only costs caused by this order are counted; shared overhead is excluded.
- Payment terms are costed at your cost of capital, whatever the customer actually does.
- Freight and commission are a percent of order value.
- It is an estimate from your own inputs. Results from different tools overlap and must never be added together into one savings figure.
Sources
- Nagle, T., Hogan, J. & Zale, J., The Strategy and Tactics of Pricing (Routledge, 6th ed.) — Contribution-based pricing and cost-to-serve.
- Brealey, R., Myers, S. & Allen, F., Principles of Corporate Finance (McGraw-Hill) — Cost of capital applied to receivables.
Questions people ask
How do I know if a quote is profitable?
Subtract everything the order causes — materials, labour, setup, freight, commission and the cost of waiting to be paid — from the order value. Compare what is left with your target margin.
Why count payment terms?
Waiting 45 days for $60,000 ties up cash that costs money. At 8% a year it is about $592 on this order — small alone, large across a book of orders.
Related tools
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