Page 143 - Finance for Non-Financial Managers

Siciliano08.qxd 2/8/2003 7:18 AM Page 124
Finance for Non-Financial Managers
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How to Make More Money by
Making Less Product!
Wonder Widget makes two home products, each with iden-
tical unit sales.The WW-1000 sells for $425; the custom-made WW-
Super 1000 sells for $575.The combined sales of $1 million produces
a gross profit of $250,000 each month, or 25%. But the company
doesn’t know how much each unit costs.They just know that the
WW-Super 1000 sells better and, even though it’s more difficult to
make, they’re charging more for it, so they believe the resulting gross
profit show that their strategy is sound.
Their financial consultant divides all their cost of sales into two
buckets, including the added labor it takes to make the luxury model.
WW-Super
WW-1000 Total
1000
Selling price per unit 425 575
No. units sold 1,000 1,000
Total sales 425,000 575,000 1,000,000
Cost per unit
Materials 25 25
Labor 40 240

Overhead (150% of Labor) 60 360
Total cost per unit 125 625
Total cost of sales 125,000 625,000 750,000
Gross Profit 300,000 (50,000) 250,000

Figure 8-1. Gross profit contribution from multiple products
The embarrassed owners of Wonder Widget learned that their best
revenue producer was actually losing money, due to the high cost of
labor.The real surprise: they could make $50,000 a month more—
increase their current gross profit by 20%—if they simply stopped
making the deluxe model!

lenging aspects of this is capturing the time that workers spend
on each job or part that they work on—job costing or process