Now that we have our current T/CU for each product/service we calculate the minimum T/CU we need to cover all of our Operating Expenses plus make the profit we want. Here’s how we do that:
Min T/CU = (annual OE + annual profit) divided by annual available constraint units
Operating Expenses (OE) are all the costs that don’t change when you sell just ONE more of your product/service. They are all the costs not captured in the TVCs (Truly Variable Costs) and typically include rents, utilities, selling/marketing, general admin, all labor including direct, maintenance, and warehousing expenses.
To start, you can use your current annual profit, then increase it to see where you need to price to meet your profit goals.
Constraints Units (CU) are the annual number of hours or minutes you have available. So you you work one shift then use the time from one shift times about 70% which takes breaks and other misc downtime.
Now you have 1) your current T/CU for each product (see Part 1) and 2) the minimum T/Cu you need for each product.
…to be continued…
Here’s to maximizing YOUR profits!
By Dr Lisa Lang
© 2008-2020 Science of Business Inc.
Yes, It was beginning to sound like “allocation” and the traditional mindset, so thanks the clarification, Lisa.
It has been very helpful.
BR Bo
Hi Lisa
How do you handle the Min TVC/annual OE calculation for products X and Y in productions of multiple Department, e.g A and B, where B is bottleneck, but some products X only needs Dept A involvement to be produced and others products Y needs both A +B?
BR Bo
Hi Bo,
I’m not sure I understand what you’re asking. You mention TVC/OE but in this post I’m calculating the Min T/CU.
It’s almost always the case that products have different routings. To do this calculation, you need to know which resource is your constraint given your current situation (taking into account what you sell and what capacity that consumes).
We have more information and a coaching program on this at https://velocitypricingsystem.com/
Thanks
Dr Lisa
Hi Lisa
Thanks for the quick answer. Yes, the TVC/OE was misleading, sorry.
My question is if you always use the total OE of the factory or do you adjust the OE to only cover relevant departments when you have different routing? like in my example: product X’s min T/CU = (profit +OE for department A)/ CU for department A.
We do not allocate in Throughput Accounting so you use the whole OE.
There is also typically only 1 constraint per shop.