November 29, 2016
Let’s say you just got an order for 5,000 boxes from customer X through salesperson A. The order calls for a labeled sheet, which must be die-cut and then joined on a specialty folder gluer. It must then be assembled with a standard base and header, packed out with product, and then shipped to four different locations. All of the finished boxes must be on a pallet and covered in shrink-wrap. The customer has asked for one price, which you quote at $27,500 ($5.50/unit). Your work-up of this price is as follows:
At the end of the day, you have a contribution margin ($27,500–$21,588) of $5,912 (21.5 percent) and a return on sale ($27,500–$26,163) of $1,337 (4.9 percent—index 95.1). The books would record a sale and account receivable of $27,500, and the salesperson would be paid a commission (15 percent of contribution) of $887. Is this enough? Are you able to do any more analytics? Can you derive any profit center information from this posting?
I think the answer to the above questions is a resounding no. As a result of this order, you:
- Sold manufactured corrugated.
- Assembled displays.
- Packed out the displays.
- Recouped freight costs.
- Sold pallets.
- Sold tooling.
- Tied up three pieces of manufacturing equipment for more than 12 hours.
The “big picture” analytics would say that you:
- Shipped approximately 125,000 sq. ft. of corrugated at a sales price of $27,500, which equaled almost $145/MSF.
- This order generated almost $6,000 of contribution and a contribution percentage of 21.5 percent.
- This order was sold at a reasonable profit margin/index (if you believe in such calculations!).
However, it doesn’t let us know the answers to the following questions:
- How much did we mark up the tooling?
- How much of a profit did we get on our temporary labor (assembly and pack-out)?
- Are we charging enough (or too much) for delivery?
- Did we get paid for the pallets, and did we mark them up?
- How much corrugated contribution per machine-hour did this order generate?
In order to get these details, you have to take steps to “unbundle” the sale. Just because the customer wants one price for everything ($5.50/display), doesn’t mean that you have to post your books that way. What if the entry in your books looked like this:
Accounts receivable: $27,500
Sales tooling: $1,050
Sales pallets: $2,500
Sales labor: $1,000
Freight charge: $2,560
Sales manufactured corr.: $20,390 (or possibly “Sales manufactured displays” if that is a profit center for you)
If you were to post your books this way, you might come to the following conclusions:
- Contribution per profit center was:
- Tooling: $262.50 – 25 percent
- Labor-only sales: $300 – 30 percent
- Pallets: $500 – 20 percent
- Manufactured corrugated: $5,912 – 32 percent – $595/major machine-hour, and it might let you populate a profit center called “manufactured displays” on the income statement.
If you tracked the freight charge on all of your orders and compared it to your freight cost, you would also get some useful information about the adequacy of the charges.
If you posted all of your sales this way, you would be able to develop metrics about the profitability of your business that you can only dream about currently. While it may be expedient to give a customer one price for a host of bundled products and services, in order to really know what is going on, you need to take steps to “unbundle” the sale and look at each component separately.
Mitch Klingher is a partner of Klingher Nadler LLP. He can be reached at 201-731-3025 or mitch@klinghernadler.com.
