Total Factory Cost of Product

As promised in the previous blog, today we take an in depth look at Total Factory Cost of Product. In this entry we use two example printers, a profit leader and an average printer with $1.7 million in annual sales.  In future entries we will cover mid-sized and larger printers.

1. How much does it cost an average printer and a profit leading printer with $1.7 million in sales to produce their finished product?

Total Factory Cost of Product is 8.28% less for the profit leading printer than the average printer, resulting in $140,760 in savings for our $1.7 million printer. Gross profits for the average $1.7 million printer were 19.85% compared to 28.13% for the profit leader. This significant savings provides the profit leaders with additional funds to cover SG&A, interest expenses, and other expenses and achieve a profit before income taxes of 5.93% compared to a loss of 4.23% for the average $1.7 million printer.

Profit leaders with sales less than $3 million averaged profits of $87,779 while the average printer had a loss of $79,778. The significant efficiencies that the profit leaders achieved in producing their product added to their bottom line and helped them remain profitable in 2009 despite the recession and declining sales.

1. How much more efficiently does the profit leader work, and where are most of the efficiencies realized?

As mentioned above the example profit-leading printer’s Total Factory Cost of Product is 8.28% or $140,760 less than the average printer of similar size. The next question is how they achieve these efficiencies.

In the first line item, “Paper,” profit leaders on average spend 1.87% or $31,790 less. Some reasons for this variance include the average printers:

1. Purchasing polices need adjustment.
2. Improper control of waste and spoilage. Proper handling of paper is extremely important in all phases of production—shipment, storage, pressroom, bindery, etc.
3. The type and quality of paper required by the jobs that this group of average printers produces could have an adverse effect on paper costs, as could product mix.
4. Selling price could be too low.

The effective manager will investigate these areas to find out where the problem or problems are occurring. If the manager can take corrective action, the amount of money being spent on paper will decrease. If the problem is beyond his control and cannot be corrected, he will at least understand the reasons for this high paper cost.