A founder quotes a factory, gets $11.40 per unit, and builds a business plan around it. Eighteen months later the product ships and the real delivered cost is $18.75. Nothing went wrong at the factory. The gap is everything that sits between an assembly quote and a unit sitting in a warehouse ready to sell: freight, duty, scrap, packaging, tooling paid off over a finite run, and the failures that come back. Cost of goods sold is the sum of all of it, and every pricing, funding, and channel decision downstream depends on getting the number right before you commit.

Layer One: The Bill of Materials

The BOM is the parts list with a price against every line at the quantity you will actually order. Two disciplines separate a useful BOM from a decorative one. First, price at real volume — a connector that costs $0.42 at 10,000 pieces costs $1.15 at 250, and your first production run is closer to 250. Second, include every consumable: thermal pad, adhesive, thread-locker, label, desiccant pack, screws. Fasteners and adhesives routinely add 3 to 6 percent that nobody budgeted. Structure and maintenance of the list are covered in the bill of materials guide.

Split the BOM into three buckets: custom parts made from your tooling, catalog components, and packaging. Packaging is the line most often forgotten and is rarely under 4 percent of COGS for a retail product.

Layer Two: Labor and Overhead in the Factory

Contract manufacturers usually quote assembly labor as a rate per unit derived from a cycle time and a fully burdened hourly rate. In coastal China that burdened rate might be $5 to $9 an hour; in Vietnam somewhat less; in a US contract shop $45 to $75. What matters is not the rate but the cycle time your design imposes. A product that takes 14 minutes to assemble instead of 6 costs three times as much in labor, and that difference is set in CAD, not on the floor — which is the entire argument in design for assembly.

Factory overhead — floor space, equipment, supervision, quality staff — is normally folded into the quoted labor rate. Test time counts as labor: if final functional test takes four minutes per unit, that is real cost whether or not the quote breaks it out. Reading what a quote does and does not contain is a skill in itself, described in how to read a manufacturing quote.

Layer Three: Scrap, Yield, and Rework

No line runs at 100 percent. A mature injection-molded part might scrap 1 to 2 percent; a new mold in its first weeks can scrap 8 percent. Electronic assemblies with first-pass yield of 94 percent mean six units in every hundred need rework at technician time you pay for. The arithmetic is simple and brutal: if first-pass yield is 92 percent and rework recovers most but not all, effective cost per good unit rises roughly 8 to 10 percent above nominal.

Budget a yield loss line explicitly: two percent for a stable mechanical product, five to eight for a first electronics run. Ignoring it is how a plan showing 45 percent gross margin delivers 38.

Layer Four: Tooling Amortization

Tooling is capital, not per-unit cost, but you have to recover it. A three-cavity steel mold for a mid-size enclosure runs $18,000 to $35,000, and a family of parts plus fixtures can put total tooling at $60,000. Divide by the units you honestly expect to sell over the tool's useful life. Twenty thousand units against $60,000 of tooling adds $3.00 per unit; sixty thousand units adds $1.00. Founders amortize over a fantasy volume and then wonder where the cash went. Compare the alternatives before committing, using injection molding costs, and consider whether a lower-volume process defers the capital until demand is proven.

Layer Five: Getting It Into the Country

For an imported product this layer is often 8 to 15 percent of landed cost, and it moves.

  • Ocean freight per 40-foot container has swung between roughly $1,800 and well over $15,000 in recent cycles. On a container holding 6,000 units that is $0.30 versus $2.50 apiece.
  • Duty at the base HTS rate plus any Section 301 tariff line applicable to the classification. Consumer electronics categories have carried an additional 25 percent on top of a base rate that might be 2.6 percent.
  • Customs brokerage, harbor maintenance and merchandise processing fees, drayage, and warehouse receiving — small individually, $0.20 to $0.60 per unit together on a typical shipment.

Details of the tariff layer are in US import duties and tariffs on products made in China, and the freight tradeoff is worked through in ocean freight versus air freight.

Layer Six: The Costs After the Sale

Warranty returns, replacement units, and reverse logistics belong in COGS if you want an honest gross margin. A 3 percent return rate on a $20 product costs $0.60 per unit sold plus shipping both directions. Fulfillment, transaction-based marketplace fees, and inventory carrying cost round it out.

A Worked Example

A connected consumer device, 20,000 units in year one:

  • BOM at 20,000-piece pricing: $9.10
  • Packaging and printed materials: $0.85
  • Assembly and test labor: $2.40
  • Yield loss at 4 percent: $0.49
  • Tooling amortized ($72,000 over 20,000 units): $3.60
  • Ocean freight and drayage: $0.65
  • Duty and tariff at 27.6 percent of declared value: $3.35
  • Brokerage, fees, warehouse receiving: $0.35
  • Warranty reserve at 3 percent: $0.62

Landed COGS: $21.41. The factory quote everyone remembered was $11.50.

From COGS to Shelf Price

Each channel stacks a margin on top. Selling direct, you keep the spread minus advertising and payment fees. Through a distributor, expect the distributor to take 20 to 30 percent and the retailer 40 to 50 percent of the final price, meaning your ex-works price must be roughly one-quarter to one-third of MSRP for the chain to work. At $21.41 landed, a distributor-plus-retail model needs an MSRP near $89 to $99, not $49. The full markup arithmetic is laid out in how to price a product.

If the number does not clear, the fix is design, not negotiation. Part-count reduction, material substitution, and process change routinely take 15 to 30 percent out of a first-generation cost structure — the systematic version of that is value engineering.

Get a Cost Model Before You Cut Steel

Projects House builds landed-cost models alongside the design, so tooling decisions get made against a real margin target rather than a hopeful one. Send your BOM, target volume, and channel plan through our contact form.