off the mat
How to Drive Profits at the Asphalt Plant U
Understanding the numbers behind the asphalt plant takes proper effort to maximize the return on investment (ROI). We will explore some financial challenges the plant presents, and how to manage your business around those challenges to help drive profits. In evaluating the financial position of a plant, there are three primary drivers to consider when determining its return on investment: fixed costs, variable costs and sale price of mix. It is critical to understand how these three drivers interact together. However, every plant is different in its management and operating style so the impact these drivers have on your plant must be examined and applied to your specific situation.
FIXED COSTS
Fixed costs are those that are incurred regardless of how many tons are run through the plant in a given time period (hourly/daily/weekly/monthly/annual). The cost per ton produced will vary depending on how many tons are run through the plant. These costs would commonly include salaries and benefits for plant managers, property and casualty insurance, depreciation, property taxes, and administrative overhead allocations.
VARIABLE COSTS
Variable costs are those that are incurred primarily when the plant is running and the cost per ton produced does not vary depending on how many tons are run through the plant. However, the total dol-
lars expended do vary based upon the number of tons run through the plant. Variable costs commonly include liquid asphalt, aggregates, hourly labor and benefits, repairs and maintenance, plant gas or electricity, and plant fuel. The variable costs such as liquid asphalt and aggregates also vary depending on the composition of the asphalt blend.
SALE PRICE
Sale price is the market price charged for each transaction when asphalt is sold by the plant. This price varies depending on the asphalt blend and does not include transportation to the job site. To begin understanding the relationship these three drivers have with each other, it is common to begin with a break-even analysis. To quantify the break-even point a plant has, the following formula is used:
Break Even Tons = Fixed Costs Sale Price per Ton – Variable Costs per Ton The next step beyond break-even is determining a targeted ROI the plant expects to generate. When dealing with a high volume of transactions, understanding both fixed and variable costs down to the penny per transaction can make a significant difference at the end of a season.
Fixed Costs Average Variable Cost Per Ton Average Selling Price Per Ton Desired Net Profit
Scenario A $ 1,000,000 $ 50 $ 75 $ -
Scenario B $ 1,000,000 $ 50 $ 75 $ 250,000
Scenario C $ 1,000,000 $ 50 $ 65 $ 250,000
Sales Variable Costs
Scenario A Dollars Per Ton $ 3,000,000 $ $ 2,000,000 $
Scenario B Dollars Per Ton $ 3,750,000 $ 75 $ 2,500,000 $ 50
Scenario C Dollars Per Ton $ 5,416,667 $ 65 $ 4,166,667 $ 50
Direct Profit Dollars Direct Profit Percent
$
1,000,000 $ 33%
Fixed Costs
$
1,000,000
Net Profit Net Profit Percent
$
Total Tons Sold
56 // November 2020
-
0%
40,000
75 50 25 33%
$
1,250,000 $ 33%
25
$
1,000,000
$ $
-
0%
$
$
250,000 $ 7% 50,000
25 33%
$
1,250,000 $ 23%
20
$
1,000,000
5 7%
$
$
250,000 $ 5% 83,333
15 23% 12 3 5%
