Margin Analysis i NEED CURRENT MARGIN AND MARGIN POTENTIAL

Healthy margins, the difference between a product's manufacturing cost and its price, are critical to company success. The Margin Analysis will help the Research & Development Department understand the cost of material, and the Production Department understand the effect automation has on labor costs. It will also demonstrate to the Marketing Department the importance of adequate pricing, and to the Finance Department the upper limits of profitability. You will need:

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

The Segment Analysis reports (pages 5-9) of the FastTrack for Round 0

Determining Current Margin

In this activity you will calculate the Contribution Margin in dollars per unit and as a percentage of the price using the information in the Production Analysis report.

* 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 Margins Activity

In the table below enter each product's price, material cost, labor cost, 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 (%)

Determining Margin Potential

Finding the maximum amount of profit you can get from one unit of a product is called Margin Potential. Its 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 possible - Minimum Unit Costs possible

Price

Go to the Buying Criteria on the Segment Analysis pages of The Foundation FastTrack for Round 0 to find the maximum permitted price 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

Material Position Component Costs
	Trailing Edge Cost	Leading Edge Cost
Low Tech	$1.50	$8.50
High Tech	$4.00	$10.00

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

Segment	Automation level (out of 10)
Low Tech Automation	10.0
HighTech Automation	6.0

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

& mation Capacity Primary Units inven over- Next Next Pla Name Segment Sold tory. Revision Date Dec 31 MTBF Coord. Coord Price Cost Cost Marg. time Round Round Utiliz. Able 1.200 87 11/21/2011 3.1 21000 6.4 13.6 $34.00 $16.17 $10.11 63% 800 161%