Meaning
Distribution of one-time design and tooling fees across the total production volume of a custom component establishes a predictable unit price. Applying nre amortisation allows a system integrator to avoid a large upfront payment by adding a small charge to each individual chip purchased. This practice is common when developing custom integrated circuits where masks and engineering layouts represent a major initial expense.
It continues until the designated development cost has been fully recovered by the supplier.
Cost Allocation
Suppliers calculate the added cost per unit by dividing the total design fee by the planned production quantity over the life of the project. If a project requires one hundred thousand dollars in development costs and the buyer expects to purchase fifty thousand units, the supplier adds two dollars to the price of each unit. This approach helps the buyer manage their development budget by shifting capital expenses to operational expenses.
Volume Threshold
Tracking the number of shipped units is necessary to determine when the added fee should be removed from the purchase price. Once the agreed quantity is reached, the supplier must reduce the unit price to the baseline manufacturing cost. If the project is cancelled before this point, the buyer must pay the remaining balance of the development fee.
Contract Boundary
Agreements must define the consequences if the production run does not reach the expected volumes. When sales are lower than projected, the supplier has the right to bill the buyer for the unrecovered portion of the engineering fees. Having a clear agreement on these limits prevents financial disputes if market demand changes.