Why? You're making the same $5k per engine either way, but you've got considerably lower up-front labor costs and lower inventory "drag" for the cheaper engine. All things being equal, volume can be expected to be higher at a lower price point, and that leads to efficiencies.
Because the
other overhead items remain roughly the same, regardless of how much you charge for your engine and how many you make. It's not all about parts and material costs; it's not even
mostly about parts and material costs. At the end of the day, you personally will be making "x" dollars a year as your salary, just turning on the lights costs "y", paying the salaries of any employees or outside vendors helping you build engines costs "z", and on down the line, including building rent, insurance (liability
and worker's comp), tools, taxes, waste disposal fees, advertising costs, your share of your employee's medical insurance and Social Security taxes,
ad nauseum. Every penny of all of that comes out of what people pay you for your engines, less material and parts costs.
If the parts and materials cost for each engine is $5,000, then I have a
very hard time imagining that you can pay for all these other things with another $5,000 per engine, at any reasonable dream of production rates for aviation engines. If you sell 100 engines a year, that's $500,000 a year to pay for everything and everyone associated with making those engines, on
top of material and parts costs.
Everything and everyone, including yourself.
Example: I occasionally broker printing on the graphics projects I do. When I first started out, I was aghast that I was being told, as a general rule, to mark up my costs for printing "about 20%" and have the customer pay the marked-up price. 20% seemed
awfully greedy! Then I started wondering why the more printing jobs I brokered, the worse my business seemed to do. I sat down and figured out the math on this
very simple case. Let's say I'm charged "$1000" for a print job. I give the vendor $1,000, and they give me the printed pieces. I then charge the customer $1,000 for the print job. They give me $1,000. I'm charged income tax on the $1,000 that customer paid me by both the feds and my glorious state of California. Let's say my federal tax bracket is 15%. California lovingly charges me another 8% for the privilege of living here. So that's $230 out the door, just in taxes. The printing cost me $1,000, the client gave me $1,000, and the federal and state governments took $230 of that for themselves. Charging my client even-money on the printing (no mark-up) means I
lose $230 every time it happens. No profit - I'm taking a loss. I have to charge $1,230 to the client
just to break even (actually, slightly more, but let's keep this simple)
. A 23% mark-up doesn't make me any profit at all - it just stops me from
losing money on the deal. And that's just to cover taxes - the gasoline I burn to go pick up the print job and take it to the client, or delivery fees if I pay someone else to do it, come in on top of
that. My real markup on things like print jobs is 30%, and it's not even remotely some kind of "profit center" for me. I still come
very close to breaking even or losing money on brokering, which is why I don't like doing it very much.
Now carry that across to everything else needed to build a widget or an engine. Running a business is
way more expensive than most people understand. It's a wonder the manufacturer can make them so
inexpensively without losing their shirt.
This is Business 101. And it's why so many new companies go under in their first year. Or their fifth year. I'm on my 13th year of being in business, and I'm
still learning how to do it, I think.
Rant over. Carry on.
