Category Archives: Financial

Using Excel to Compute Effective Tax Rate

I have been working as a contractor for the last few months and it is now time for me to make a quarterly tax payment to the folks at the Internal Revenue Service (IRS). This involves using some tables listed on Form 1040ES (see Appendix A). The US tax code uses has a graduated tax rate; the tax rates on higher amounts of income are higher than on lower amounts. As I calculated my tax payment, I became curious as to my effective tax rate. I am going to use Excel to duplicate a graph that I saw on the Wikipedia. My version of the graph is shown in Figure 1. Continue reading

 
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The Cost of Minting Coins

I rarely think of the US government as producing any physical products, but there is one product that only it produces and that is extremely profitable – US money. The government sells money at its face value, which historically has had higher value than the cost of manufacturing it. In the year 2010, the US Mint generated $6.3 billion in profit from selling the money it manufactures. Continue reading

 
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Computing List Price from BOM Cost

All engineers must be familiar with the basics of product costing. In this post, I will cover a common product cost model (Figure 1) and provide two examples that illustrate how to calculate the list price of a product given the product's component costs plus some corporate parameters, like average discount rate and required gross margin. Continue reading

 
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Incorrectly Computed Discount Followed By Markup

A few years ago, I hired a tile installer to tile a bathroom I was remodeling. He was a talkative guy, and he casually mentioned that he had chosen not to make any money on his material – he would make his money on labor alone. He said that most of the tile shops he works with give him a 15% discount on material, which he passes on to his customers. Other contractors markup their material charge by 15% to bring the cost back to retail price – this statement bothered me because the markup should be larger than the discount. The math did not seem right to me at the time, but I did not raise any questions because I wanted my bathroom done. I did not think much about this math error at the time until I saw an article in the Journal of Light Construction (JLC) telling contractors that this is a math error that is costing them money. As I read the article, I realized that this is exactly the same error I heard my tile contractor make. Continue reading

 
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A Couple of Cost Versus Run Rate Examples

I spend a fair amount of time estimating the cost of electronic components with different purchase quantities. In earlier posts, I showed how component cost quotes often reduce by ~7 % per doubling of quantity purchased. In this post, I will present quotes from two different vendors for the same part (normalized to preserve confidentiality). The component quotes from each vendor reduced by 3.6% per doubling of quantity purchased, which differs significantly from my 7% rule. While each vendor had different costs, their rates of variation with purchase quantity were identical. As I thought about these quotes, their deviation from what I usually see made sense. Continue reading

 
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Modeling Component Costs Over Time

I frequently am asked by marketing and finance people about how component costs will vary with time. Their motivations are clear – most market segments are strongly driven by unit cost, and the marketing folks need to determine when costs will drop enough to enlarge the Total Addressable Market (TAM) for their products. Continue reading

 
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Gross Margin Versus Labor and Material Markups

I have spent a fair portion of my career working as an engineering contractor. In fact, I spent five years working on new business development for a large contract firm. During this time, I was involved in writing dozens of proposals on large projects. A proposal occurs at the end of the bid and proposal process (Figure 1) and constitutes a contract firm's attempt to win the project development contract. It is a key part of new business development for many companies. Continue reading

 
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Greece GDP Versus State GDPs

I have been trying to understand the economic situation with Greece and its creditors, but it has been difficult because I do not have an intuitive feel for the size of the Greek economy. To understand a number, I need to relate it to something that I know. Continue reading

 
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Another Real Life Savings Example

I really enjoy managing my own investments and I draw inspiration from the stories of other amateur investors who have been successful at saving and investing. My working class upbringing did not provide me with any exposure to investing in my youth, so I really did not start actively investing until I was in my late 30s – now I wish I would have started about ten years earlier. Continue reading

 
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Reasonable Budget Plan for a Young Person

In my role as annoying father, I regularly talk to my sons about financial matters and this post summaries a recent discussion on budgeting. One reasonable goal for a young person's budget is called the "60% solution". Continue reading

 
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