Product Manufacturing, Research and Development, and Product Costs and Profit

Last Updated: August 22, 2009

Product Manufacturing

Research and Development (R+D) is the most important part of the manufacturing process, creating and developing the products you will make and sell. There are however many aspects not traditionally associated with R+D that should be considered alongside it to help improve the process and results.

If your business is a limited company and conducts certain types of creative or innovative R+D, you may be entitled to tax credits of up to 150% on equipment and some costs from the government. Further pages of information can be found in the links section

Identifying the Product

As part of the research undertaken with a new product, you need to look at its identity. What type of product is it, and what market does it come under?

Most importantly, you need to make a clear judgement on the product you are going to take forward; what features it has, the materials you plan to make it with, and the market(s) you think it could be aimed at. This will help you get more accurate results than if you are unsure of what the product should do or who it should be sold to.

Can the Product be Produced at Reasonable Cost?

Every product needs to be able to make a profit, and one of the first things you need to look at is how much production of your developed product is likely to cost. This will allow you to analyse potential sales more accurately, as well as give you time to solve any problem that arise. The three most important areas of costing are:

1. What components and materials will you be using ? – You need to look at both the current cost and past fluctuations in cost to work out whether your choice of materials will be sustainable. Some commodities (e.g. Metals such as gold and silver, silicon, plastics and other oil based materials) commonly go up and down in cost, which could affect the profits or price of your product considerably.

2. What Form of Manufacture Will You Use ? – You need to look at how you will make your products and the affect this will have on costs:

Making goods by hand will have little in the way of equipment costs, but will increase the cost of manufacturing per item (wage costs and lower production rates) considerably.
Using an entirely machine operated system to make your goods will dramatically lower the cost of production per item, and will increase potential output massively, but will require a huge outlay on equipment.

For most businesses, a combination of these two methods is appropriate, but you will need to be sure of whether your products can be both profitable and competitive.

Many new manufacturing businesses opt for hand or small scale production to save costs, and then expand to larger, more automated systems if sales take off.

3. What is Your Anticipated Profit Margin ? – Does the product look capable of making a profit? You should look at material and production costs, taking possible fluctuations into account, as well as looking at prices of similar items. If the profit margin appears to be too small, then you know that further research may be a waste of money.

You can use the estimated profit per item to work out how many products you need to sell to break even, this figure can be compared with estimated sales figures to help you look at the potential success of the business.

“Remember to include all costs when you work out potential profits”

Remember that when you look at profits, you need to include all costs in your workings otherwise you could end up making a loss once wages, equipment and marketing costs are included.