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Component Manufacturing dverti$er
Don’t Forget! You Saw it in the
Adverti$er
June 2020 #12251 Page #24
Three Conditions for Smarter Margin Application to Make Healthier Profits Todd Drummond
stablishing a proper margin to maximize profits for your roof truss component sales is not as easy as most people think. Most do not have a clear understanding of how small changes make a significant impact on the company’s profitability. Making the most profits possible, no matter what the markets may be doing, should always be the main focus. During these uncertain times, perhaps it is wise to take a few moments and review some key points to reevaluate how your company is positioning itself within your sales market.
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The ironclad golden rule about margin and profitability:
It is not the percentage of sales of margin that determines profitability but the total accumulative margins dollars that lead to a profit or loss. For an understanding of common terminology, the margin is defined as the total sales minus direct cost of manufacturing (material and labor). Any indirect cost (anything that is not material or shop labor cost) being applied as a direct cost is not considered as being margin for this article. Case #1 – Markets collapse, and your company has spare production capacity. This very scenario happened during the ’08 building crisis. Example: • Sales average 35% margin at 100k, which is 35k per month. • Sales are only producing 50% of production capacity. • Problem – Break-even to cover the indirect cost is greater than $35k per month. Question for your company – What is your company’s break-even to cover the indirect costs? If you do not know, you certainly should. Continued next page
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