Question

Sometimes suppliers will not share cost data outright. As the purchaser you will have to utilize reverse price analysis, describe the formula and when would you use it?

Answer 1

There is no specific formula to find out the cost and it depends on case by case for reverse price analysis.

Example: In case of a supplier who gives material 'X' to you, below are the costs to be considered to derive the price:

• Quantity of different raw materials required to produce one of unit of X
• Costs of all the raw materials going to produce 'X'
• Labor time in man hours to produce one unit of 'X'
• Man hour rate
• Utility cost for one of 'X'
• Rent of the place per month
• Productivity rate of machine to derive per month capacity
• Machine or equipment rent cost per day or month
• Other expenses like Housekeeping, Security, Stationary etc.
• Profit %

The above method is very useful to determine cost in case of procurement of any material or service. It helps to justify the payout made to vendor and in case of higher rate, negotiations can be done appropriately. It can also be used to evaluate various production options for marketing. It can be used to compare prices between different vendors and make optimal decision.