7.4 Margin Analysis

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.

Enter the name of your company's product for each segment in the Product Name column in the top part of Form 4. You will find this information in the Production Analysis, page 4 of The Capstone Courier for Round 0. The names of your products start with the first letter of your company's name. If you are not yet assigned to a company use the Andrews Company information.

Next, enter each product's price, material cost, labor cost, and note whether or not (Y/N) a second shift was used.

Calculate the Contribution Margin (assume there is no inventory and therefore no Inventory Carrying cost):

Contribution Margin Price - (Material Cost + Labor Cost)

Calculate the Margin Percentage:

Margin Percentage = Contribution Margin / Price

Enter these results into the top part of Form 4.

7.4.1 Margin Potential

Use the bottom part of Form 4 to determine the margin potential. Go to the Buying Criteria on the Segment Analysis pages of The Capstone Courier for Round 0 to find the maximum permitted price and the minimum acceptable Mean Time Between Failure (MTBF) for each segment (lowering the MTBF decreases material cost). Determine the minimum Material Cost per segment using the following equation (see Table 7.5 for an example):

Minimum Material Cost = ($0.0003 x Minimum Acceptable MTBF) +Trailing Edge Positioning Cost in Table 7.4

Determine the minimum Labor Cost for each segment. Assume a base labor cost of $11.20 ($11.20 is a rough estimate of the labor cost. It is used solely to illustrate the Margin Potential concept):

Find the Contribution Margin dollars and Contribution Margin percent:

Contribution Margin = Price - (Material Cost + Labor Cost)

Margin Percentage = Contribution Margin / Price

Table 7.1 Material Positioning Component Costs: These costs are for the beginning of Round 1. They are used solely to illustrate the Margin Potential concept.

The Trailing Edge Positioning Cost indicates the cost of material for products placed in the upper-left quadrant of the fine cut circle, where products are larger in size and slower in performance. Consequently, the material cost is less than for products at the Leading Edge (the lower-right quadrant), where size is smaller and performance is faster. These costs drift with the circle.

Table 7.2 Minimum Material Costs for the Traditional Segment: Assumes the Traditional minimum reliability is 14,000. Use the Traditional Segment Analysis to determine the exact value.

Form 4: Margin Analysis