Why Is the Cost Estimate of Apple Watch Incorrect?
According to IHS, the Apple Watch only costs $83.70 to make, but the company sells it at $349 each. The estimate, however, is a breakdown of the components found in each device, including the box contents, and so on.
Executives now claim that the gross profit margins for the Apple Watch miss the mark significantly as it said it is below the corporate average for the coming quarter. If Apple is making 35% gross profit margin on Apple Watch Sport, which is sold at $349, implying $226.85 manufacturing cost, then that is almost triple based on the IHS info.
The manufacturing cost is technically the entire basis as summing up the costs of individual components of a product is not enough, considering the assembly, high-tech equipment, and the depreciation of such equipment. Experts say that Apple categorizes the labor costs under costs of goods, rather than in operating expenses, adding to the overhead expense of every device created.
Defective products should also be considered and the profit earned by contract manufactures as Apple hire them throughout the building of its products. Everything contributes to the average cost of a device that reaches store shelves. Designing, marketing, and research and development also lump into the operating expenses, affecting the overall project and the company profitability; however, these do not affect the gross profit margins.
Hence, Apple’s claims are incorrect according to experts, while the HIS teardown is seemingly correct as it only accounts the manufacturing and component costs. This is because the actual manufacturing costs implied by the gross margin profile are relatively higher than the implications of HIS cost estimate.