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 Profit Planning is based on the assumption that when determining the cost of an order, only direct (or variable) cost items, those directly identifiable with the job, can be considered. Any attempt to somehow squeeze fixed cost onto an estimate must involve some arbitrary method of allocation. This clouds the profit picture (for how much rent should a single job absorb?), and robs management of profit planning tools that would otherwise help analyze and run the business. How then are depreciation, taxes, and your salary covered by the estimate? Contribution, the amount left over from sales after the direct cost has been subtracted, will do the trick. And Contribution's yardstick is the Contribution Factor, also called CF. It's the rate at which Contribution accumulates to absorb Fixed Costs. When Contribution covers every Fixed expense, Breakeven is achieved and Profit will be equal to zero. After Breakeven, every dollar of Contribution is equal to a dollar of Profit. Target Selling MHRs are determined by factoring the OOP MHRs to include Fixed (period) costs and planned Profit. But these are internal rates only, without market intelligence. Since the market is the true determination of price, our goal will be to compare the actual selling prices of the mix to direct cost estimates. In this way, we show the potential profitability of each customer. TMG will develop for your firm a unique pricing system which maximizes market intelligence while at the same time satisfies the goals of the Profit Plan. For additional information, contact Howie Herbitter. |
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