Mouldings manufacturers have not had a price increase for several years. In fact our industry, as well as many associated ones, have seen real price reductions. I believe this situation now has to change. Producers cannot continue reducing selling prices when wages, electricity, diesel, rates and now raw material prices are continuing to rise.

These general increases in manufacturing, administration and transport costs over the past few years have, to date, been totally absorbed at the manufacturing end. However, with mouldings raw material producers losing money, it is obvious they now need an increase. And, so we don’t end up losing money too, the percentage has to be passed on.

I asked our accountant to clarify what W Howard needs to raise selling prices by to maintain gross margins. They gave the following scenario, stressing that it is strictly an example to keep the figures simple.

Imagine, the accountant said, you open that letter or receive the telephone call from your supplier: “we regret to inform you that due to circumstances beyond our control the prices of our materials will rise by 4%.” Panic sets in. Do you simply reiterate the letter to your customers? Aren’t they bound to resist the price rise? How would this price increase affect your mark-up and gross profit?

Let’s get back to basics. What is the difference between the calculation of mark-up and gross profit? Mark-up is the amount that you increase your cost of sales by to produce the selling price. Gross profit is the profit after deducting cost of sales from sales, which is then expressed as a percentage, for instance:

    Sales = £75

    Cost of sales = £50

    Gross profit = £25

    Gross profit % = 33.3%

    Mark-up = 50%

So, a 50% mark-up gives a gross profit of 33.3%.

But back to the problem in hand. The supplier is to increase your raw materials by 4% so what do you have to do to your selling price to maintain your gross profit percentage?

We need to determine what percentage price rise we are looking at by solving the following:

    New selling price = ?

    Original cost = £50

    Price increase – 4% = £2

    New cost = £52

    Mark-up – 50% = £26

    New selling price = £78

    Gross profit – £26 on £78 = 33.3%

This is also a 4% increase on the original selling price of £75, giving £78.

Therefore, to achieve the same mark-up and gross profit percentage, the selling price needs to increase from £75 to £78. This is an increase of £3, not £2 which is the supplier’s increase. If you only increase your selling price by £2 to £77 then you will be losing nearly 1% of gross profit.

But then you may realise your customers will not accept your price increase and, therefore, the position is as follows:

    Selling price = £75

    Cost = £52

    Gross profit = £23

    Gross profit % = 30.7%

It now means that to maintain your profit you have to sell more mouldings, otherwise the contribution to your overheads will decrease and your overall profits will fall.

The lesson to be learned by the mouldings industry, according to our accountant, is that you must try and pass on the same price rise you received or, if that is not possible, operate more efficiently and cut overheads. It then all made perfect sense to us.

It takes a while to get that message across to customers – but if we don’t, it’s a slippery slope to ruin.