HOW TO CALCULATE PRICING YOUR MUSIC CORRECTLY: Part 2 - Equipment Depreciation.
As a continuation from Article 1, How To Price Your Music: Part 1, we take a look at how to add the depreciation of your equipment to the cost and how to incorporate it in your pricing plan.
EQUIPMENT The computers, software, speakers, and the lot, can be costly in creating your products. All of your equipment costs money and has a depreciation value. This is how you can calculate its value and incorporate it into your pricing.
Depreciation is an accounting term that refers to the allocation of cost over the period in which an asset is used. In business, the cost of equipment is generally allocated as depreciation expense over a period of time known as the useful life of the equipment.
You can calculate the depreciation of business equipment if you know the original cost of the equipment, the expected residual or salvage value of the equipment and the expected useful life of the equipment.
Determine the original cost of the equipment. For example, assume the cost of the equipment was $100,000.
Determine the residual value of the equipment. Residual value is the salvage value you expect to receive by selling the equipment at the end of the equipment's useful life. For example, assume that the residual value of the equipment is $10,000.
Subtract the residual value from Step Two from the original cost in Step One. Continuing the same example, $100,000 - $10,000 = $90,000.
Determine the useful life of the equipment. The useful life is the number of years you expect to use the equipment. For example, assume the useful life of the equipment is 10 years. Divide the figure from Step Three by the useful life from Step Four. Continuing the same example, $90,000 / 10 = $9,000. this figure represents the yearly depreciation on the equipment.
STEP 1 = EVALUATE ORIGINAL COST AND HOW MUCH YOU CAN SELL IT FOR NOW. Example: All equipment combined new = $20,000
STEP 2 = SUBTRACT THE RESIDUAL VALUE FROM STEP ONE Residual value is the salvage value of expect to receive by selling the equipment at the end of its useful life. (research internet for present pricing) example)) $10,000 $20,000 - $10,000 = $10,000 is your residual value of all your equipment
STEP 3 = DETERMINE USEFUL LIFE NUMBER OF YEARS YOU WILL USE THIS EQUIPMENT Note: Look at the warrantee: How much time do have left from the purchase? If it's over, calculate future years before speculated resell. you can find this by searching the internet for its present cost (used and new)
STEP 4 = DEVIDE THE FIGURE FROM STEP 2 FROM STEP 3 (STEP 2 / STEP 3) THIS FIGURE REPRESENTS THE YEARLY DEPRECIATION ON YOUR EQUIPMENT. 10.000 / 3 = 333.33 yearly
Continuation in Part 3: OVERHEAD