You can also perform a sensitivity analysis to determine the breakeven level of T/CU. In this example, it would be the Operating Expense level of $615,000 divided by 2,912 which is $211.20.
Pricing with Throughput Accounting is much easier and potentially much more dangerous. It is easier because there is no such thing as “product cost” to calculate. Instead, each product is evaluated for its Throughput per Constraint Unit. And overall, for the business, the average T/CU must be enough to achieve the Net Profit goal. It’s dangerous because any amount of Throughput does contribute to the bottom-line, but there must be the discipline to maintain the T/CU average needed to achieve the Net Profit goal. Pricing to achieve incremental business is not for novices.
For example, say you are quoting a new job. You estimate it will take 50 hours of milling. The Truly Variable Costs are estimated to be $5,000. Here is your estimate:
Hours of milling 50
T/CU desired $258
Throughput desired $12,900
Truly Variable Costs $5,000
Total Estimate $17,900
We understand that this method is much different and you may have many questions. If so, and/or you would like help calculating T/CU for your business, please feel free to contact us.
If you’d like to learn more about Throughput Accounting, we recommend the following materials (which were also used in developing the discussion above):
- “The Haystack Syndrome” by Dr. Goldratt,
- “Throughput Accounting” by Corbett.
- “Maximizing Profitability” by Dr Lisa (hit the ground running w/ 3 hr audio and workbook)
…to be continued.
Here’s to maximizing YOUR profits!
Dr Lisa Lang