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Developing cost estimates: Wholesale and retail

Examining the costing and approval process.

In developing a line around their pricing strategy, fashion companies determine the target wholesale price and/or suggested retail price of items in the line and then work backward to target the costs for manufacturing the items.

The wholesale price is the price quoted to retail buyers at the market and is the amount the retailer will pay the fashion brand company for the goods. The wholesale price is the cost to manufacture the style plus the fashion brand company’s overhead and profit. The suggested retail price is the price for which the fashion brand company recommends that the item is sold at retail. A common strategy for wholesale and retail price estimates referred to as keystone pricing, is to double the manufacturing costs to estimate the wholesale price and to double the wholesale price to estimate the retail price (see Table 9.1). The term gross margin, or margin, refers the difference between the sales revenue and the cost of manufacturing (or at the retail level, the cost of goods sold).

The manufacturer determines the wholesale price to include overhead and profit. If keystone markup is used, then the estimated wholesale price paid by the retailer to the manufacturer will be double the cost to manufacture. The estimated suggested retail price is double the wholesale price.
For more information on estimated costs to manufacture a pair of cotton pants, please refer to the attachment titled Estimated Cost to Manufacture a Pair of Cotton Pants in the Download section below.
Based on the price zone for the line, the design team will then determine the target cost for manufacturing products in the line. During the design development process, the design team determines fabric choices, garment details, and construction factors to bring the design within the required cost for each style in the line. The design sketch may need to be reworked to meet the target cost and be approved; then a prototype garment is cut, sewn, and given final approval after a careful cost estimate has been made. Costs include the following:

Costs of materials

Initially, the cost of the materials is estimated based on the number of yards (or meters) of fabric or other materials required for making the prototype or sample garment and revised as the design is finalized. Included in the cost of materials are such items as interfacing, pocketing, and lining needed for the prototype.

Costs of trims and components

The quantity of all trims and findings are included in the cost estimate and then revised as the design is finalized. Examples of trim items include braid or lace, and findings include items such as elastic, zipper, and buttons. For the cost estimate for the cotton pants shown in the table below, one button and one zipper are needed to make this style. The cost per item is based on a large-quantity purchase for other trims and findings. For example, the cost of one button is based on the cost when a gross (12 dozen) of buttons is purchased.

Labor costs

Labor costs are determined by estimating the number of minutes required to cut (and fuse interfacing), sew/construct, and finish the garment/product multiplied by the cost per minute of labor charged by a specific factory. To estimate the number of minutes required to cut, sew/construct, and finish a new style, sewing/construction time data from similar styles are used. Labor costs vary considerably around the world. Therefore, sourcing analysts provide information regarding costs associated with manufacturing in a variety of countries. Table 9.2 compares the costs associated with manufacturing a garment in three countries. It is important to note the role that labor costs play in the overall costs of manufacturing among the three countries. Sourcing analysts will weigh the advantages and disadvantages of the sourcing criteria in making final decisions as to where to manufacture finished goods.
For a comparison of costs of producing a 96% cotton/4% spandex knit shirt in three countries (US$), please refer to the attachment available in the Download section below.

Other costs

When establishing the cost estimate, it is necessary to include other items that affect the cost. Some of these items include: packaging and/or hangers, hangtags, labels, and freight charges for a pair of cotton pants. If a style is manufactured offshore, other costs might include duty charges (tariffs) and fees to shipping agents and freight consolidators. In fact, large fashion brand companies that import merchandise from offshore contractors may change materials or the design to achieve more favorable tariff rates.

After determining a cost estimate, it’s imperative that you gain approval from the design team. We’ll look at this next.

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Product Design and Manufacturing Processes in the Fashion Industry

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