Tuesday, July 12, 2005

18. BUYING IN BRACKETS

SYNOPSIS:
Bracketed pricing is a standard in the patch biz as well as many other businesses involving manufactured commodities. It's important to understand how bracketed pricing works if you want to get the most for your patch dollar. A simple mathematical calculation might get you more patches for less money, so read on. If you already understand how bracketed pricing works, jump to the summary at the end of this page.

DETAILS:
In this section you'll quickly learn how to make the best decision possible regarding what quantity to buy. Here's an example of bracketed pricing.

100 pcs = $2.00 ea.
200 pcs = $1.50 ea.
300 pcs = $1.25 ea.
500 pcs = $0.90 ea.

The list above shows the price for various quantities of the same commodity and how the unit price decreases as the quantity increases. The quantity brackets are 100-199, 200-299, and 300-499.

The Break-Even Point (BEP)
In each bracket there is a point (quantity) at which the total cost of the product is equal to the total cost of the product when purchased at the lower limit of the next highest quantity bracket. Take the 100-199 bracket for example. The break-even point would be the quantity between 99 and 200 pcs where the total cost would be equal to the total cost at 200 pcs or $300.

Calculating the BEP
Calculating the BEP is simple. Using the numbers above, just divide the total cost of the next highest bracket's lower limit ($300) by the unit cost of the bracket in which you want to know the BEP. Or, divide $300 by $2.00 to get 150. Then:

BEP = 150 pcs.

Now, you try it. Calculate the BEP for the 200-299 bracket and continue reading when you have your answer.

Done? Simple, huh? Okay, here's the equation to find the BEP for the 200-299 bracket so you can see if you got the correct answer.

BEP = ($1.25 x 300)/$1.50 = 250 pcs

WHY BEP?
The reason you'll want to know the BEP is because it is the point (quantity) beyond which you will be paying more than you would if you bought the lower limit quantity of the next highest bracket. In other words, if you buy above the BEP in a bracket, you're spending more money for fewer patches. You can consider it to be a jumping up point; the quantity where it pays you to jump up to the bottom of the next highest bracket and get the discount. Here's an example to make this clear.

Let's use the same numbers we've been using in our hypothetical examples above. Now suppose you want to buy 170 patches. The total cost would be 170 x $2.00 = $340. But, if you buy 200 patches you'll only pay 200 x $1.50 = $300. So, you'll save $40 by buying 30 more patches. Which would you rather have?

170 patches for $340 or
200 patches for $300

The BEP is the quantity beyond which you should not buy without jumping up to get the discount afforded by the next highest quantity bracket.

CHEAP INSURANCE
There's another advantage to calculating the BEP. It may show you how you can buy cheap insurance when you're not sure exactly how many patches you'll need. Suppose you have all of your event registrations turned in and you expect a total patch need of 140 patches. However, in prior years you've had some last minute straggler troops who've wanted to attend the event and get the patch. You could then spend another $20, the cost of 10 patches, and get 60 more patches (200 pcs total). That way you would be sure to have plenty of patches at the event and you would only have paid for another 10 patches. In other words, buy 10 more and get 60 more. That's cheap insurance and a very good reason to always do the math and keep track of where you are in the bracket in relation to the BEP.

SUMMARY
The picture below shows the relationship between quantity and price for our hypothetical example. The red areas above the BEP and below the next bracket are the quantity areas which you want to avoid. The green areas are the areas where it is okay to buy whatever quantity you need. The diamonds show you where the BEPs are.



When getting price quotes, be sure to get both the price and bracket quantities for all brackets of interest. Then as your registration numbers begin to materialize, do the math. You will be lucky if your total is in the red area because it will pay you to buy more than you need. You'll get more patches for the same or less money and may have plenty of extras in case you have late registrants or someone loses their patches.

When all is said and done, if you have patches left over you can use them as "thank yous" to volunteers who supported the event, give them to older girls on wider-ops/destinations for swaps, put them on troop banners, keep them for future use, etc. Regardless, you didn't pay for them because you made the most of buying in brackets.