Margin Analysis

Being able to calculate a healthy Margin Analysis will help the Research & Development Department understand how to change the cost of material, and the Production Department understand how to change the cost of labor.

You will need:

The Production Analysis report (page 4) of the FastTrack for Round 0

The Segment Analysis reports (pages 5-6) of the FastTrack for Round 0

Determining Current Margin

* The above product details are for example only. Your product names and data may differ, but the process to calculate margins is identical.

Useful formulas: Contribution Margin($) = Price - (Material Cost + Labor Cost) Margin Percentage (%) = Contribution Margin/Price

Calculating Margin Activity

In the table below enter each product's price, material cost, and labor cost found in your report, and note whether or not a second shift was used (Y/N). Then, use the values you entered to calculate the Contribution Margin and the Margin Percentage.

Incomplete

Current Margin
Product	Name	Price	Material Cost	Labor Cost	Second Shift (Y/N)	Contribution Margin ($)	Contribution Margin (%)

The Round 0 Foundation FastTrack

Determining Margin Potential

Finding the maximum amount of profit you can get from one unit of a product is called Margin Potential. This is useful for a company when making a decision about whether to go into production or not. In its simplest form, it is calculated as: Margin Potential = Maximum Price - Minimum Unit Costs

Price

Use the information table below to find the maximum price that customers deem acceptable. You can find this in the Customer Buying Criteria for each segment.

Minimum Material Cost

Calculate the minimum Material Cost per segment using the following equation and table below: Minimum Material Cost = [(Lowest Acceptable MTBF * 0.30) / 1000] + Trailing Edge Position Cost

Minimum Labor Cost

Calculate the minimum Labor Cost for each segment. Assume a base labor cost of $11.20 ($11.20 is a rough estimate of labor cost used solely to illustrate the Margin Potential Concept). Minimum Labor Cost = [$11.20 - (1.12 * Automation Ratings Below)] + 1.12

Customer Segment Information
	Trailing Edge Material Cost	Leading Edge Material Cost	Lowest Acceptable MTBF	Maximum Price	Automation Level (out of 10)
Low Tech	$1.50	$8.50	14,000	$35.00	10.0
High Tech	$4.00	$10.00	17,000	$45.00	6.0

Margin Potential
Product	Name	Maximum Price	Minimum Material Cost	Minimum Labor Cost	Contribution Margin ($)	Contribution Margin (%)
Low Tech
High Tech

Shift Auto &mation Capacity Unit Primary Unts Inven Age Pfmn Size Material aborCont Over- Next Name Segment Sold tor Revision Date Dec.31 MTBF Coord Coord Price Cost CostMargtime Round 3.0 Utiliz. 800 161% Able Low 1,200 87 3.121000 6.4 13.6 $34.00 $16.17$10.11 20% 63%