Why a lower wholesale price can still make sense

A candle maker can sell a candle online for $24 or sell it to a shop for $14. The direct price looks much better. The maker needs to know which costs travel with each order and how many orders the same working day can handle. A sale’s price gives only one piece of that comparison.

Follow the costs that change with each sale

OpenStax’s managerial accounting text defines contribution margin as sales less variable costs. In this example a candle costs $7 to make in either channel. On a direct order the maker also spends $2 on packing, $1 on payment fees and $4 on a shipping subsidy. That leaves $10 of contribution on a $24 sale. The shop orders in batches. Suppose its order takes $1 per candle to pack and deliver, leaving $6 of contribution on each $14 wholesale sale.

With equal unit sales, direct orders would contribute more under these assumptions. For 50 candles, the direct route would generate $500 of contribution and wholesale would generate $300. Both amounts still have to cover fixed costs before any profit remains. The maker should also keep separate any additional fixed costs of a channel, such as a selling platform subscription or a larger storage unit.

Compare the same scarce hour

Now suppose the maker can prepare and label 12 individual parcels an hour or prepare a wholesale batch of 30 candles in that time. If dispatch time is the limiting resource and enough orders are available, the direct channel contributes $120 per dispatch hour. The batch contributes $180 per dispatch hour. The lower-price channel can make better use of that particular hour.

That ordering changes if the maker is already limited by production. With the same production time per candle and too little stock to meet both sets of orders, the larger per-candle contribution may matter more. A capacity comparison starts by identifying which step actually stops the business from selling more.

Check volume and the terms of getting paid

Ask how many units each channel is likely to take and on what schedule. A confirmed order of 30 differs from a hope of 30 website purchases. Compare payment timing, minimum orders and returns, as well as cost. A profitable wholesale batch may tie up cash if the maker pays for stock well before the shop pays the invoice.

• Write one selling price and variable-cost list for each channel.
• Calculate contribution per item and per scarce hour or other constraint.
• Check order certainty, payment dates and channel-specific fixed costs before deciding how much capacity to commit.