Tag Archives | cost structure

Removal Costs

See Also:
Average Cost
Agency Costs
Fixed Costs
Variable Cost
Loan Term

Removal Costs Definition

Removal costs, defined as the costs of removing any physical material from the original location it was placed in, is an often forgotten cost. Despite this, it can have a huge effect on the finances of a company. Major manufacturing plants, businesses with fragile equipment, and multi-national corporations can see removal costs average higher than the entire yearly budget of some small businesses. Though seemingly unimportant, this plays an important role in the irregular fixed or variable costs of many companies.

Removal Cost Explanation

Removal cost, explained in varying importance and detail, remains part of the cost structure of many companies. There are 3 major factors of removal cost: labor, lease on equipment used for the removal job, and spoilage or damage to the material in transit. Removal costs can be a major line item or a minute cost depending on the type of business.

The hadron collider, due to the massive and technical nature of equipment, must make a removal cost estimate and finish work by comparing this to the actual cost of the removal job. On the other hand, the local cosmetics boutique probably never thinks about the removal cost for mannequin and inventory. Still, each of these businesses experience removal costs. In a similar manner, oil companies see removal costs for their platforms in a different light. These businesses may even see these matters as important enough to enact a removal cost management system of it’s own.

Removal costs become more complicated in different environments. In a sterile and empty warehouse, removal costs would be at their minimum. In the very same warehouse, removal costs could skyrocket simply from filling the plant with inventory which then must be worked around. Under water, in mountainous regions, and other unique terrain removal costs play an important role. One day businesses could even deal with removal costs of items in space.

Removal Cost Example

For example, Kyle owns a large distribution warehouse for oilfield equipment. His warehouse has been running for quite a while and works on a tight operations schedule. Kyle, the founder and CEO of the plant, has faith in his decision making abilities.

Kyle has found a property which will serve as a more efficient warehouse. The facility is well maintained, closer to major transportation routes, and being sold at a discounted price. Kyle decides to make the switch and prepares his employees to move.

In this project, Kyle must move inventory, inventory storage and accounting equipment, offices, and more. He sees this as a minor setback to his operations which will pay off in the end.

Kyle and his team work diligently and are nearly completed with their move. Now, the only items left are the inventory storage racks. Kyle is just about to begin when his company CFO rushes out of the office to speak with him.

Surprising News

His CFO shares surprising news: moving these racks is a poor financial decision. Kyle, skeptical of this, wants to see the proof.

Liam, the CFO, shows his work. The removal cost of the inventory storage system will cost approximately $12,000 for a plant of this size. To put things in perspective, the racks have already become fully depreciated. Liam knows that the plant, even though it is being sold, will still need storage when the new tenant moves in.

Liam, through his contacts, was able to find an inventory storage system for $14,000. Though this is more expensive than the removal cost, the item will be shipped for free. On the other hand, Liam also knows the real estate market for warehouses. A new purchaser of the property will need an inventory storage system just as Kyle did. This, along with other benefits of this property, will be of persuasive value in selling the property. His calculation, based on expertise, places this negotiating power to increase total property value by $20,000. It seems many warehouse owners have the same concerns and hassle as Kyle when they decide to move.

Conclusion

Kyle remains skeptical until Liam completes his explanation. In a persuasive manner, Liam lays out the details of the plan. On the downside, Kyle’s plant could loose $2,000. On the upside, however, Kyle’s plant can make $20,000. Kyle decides to run with the plan that Liam has carefully formulated. Kyle is pleased with Liam’s work and will treat him to an expensive steak dinner for catching the mistake before it happened.

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Margin Percentage Calculation

See Also:
Margin vs Markup
Markup Percentage Calculation
Retail Markup
Gross Profit Margin Ratio Analysis
Net Profit Margin Analysis

Margin Percentage Definition

Gross margin defined is Gross Profit/Sales Price. All items needed to calculate the gross margin percentage can be found on the income statement. The margin percentage often refers to sales or profitability which may help lead to several key understandings about the company’s business model as well as how successful the company is at maintaining its cost structure to gain the proper amount of sales. Analysis of margins within a business is often useful in controlling the price in which you need to sale as well as a control on the cost associated to make the sale. Look at the following margin percentage calculation process.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)

How to Calculate Margin Percentage

In this example, the gross margin is $25. This results in a 20% gross margin percentage:

Gross Margin Percentage = (Gross Profit/Sales Price) X 100 = ($25/$125) X 100 = 20%

Not quite the “margin percentage” we were looking for. So, how do we determine the selling price given a desired gross margin? It’s all in the inverse…of the gross margin formula, that is. By simply dividing the cost of the product or service by the inverse of the gross margin equation, you will arrive at the selling price needed to achieve the desired gross margin percentage.

For example, if a 25% gross margin percentage is desired, then the selling price would be $133.33 and the markup rate would be 33.3%:

Sales Price = Unit Cost/(1 – Gross Margin Percentage) = $100/(1 – .25) = $133.33

Markup Percentage = (Sales Price – Unit Cost)/Unit Cost = ($133.33 – $100)/$100 = 33.3%

Margin Percentage Calculation Example

Look at the following margin percentage calculation example. Glen charges a 20% markup on all projects for his computer and software company which specializes in office setup. Glen has just taken a job with a company that wants to set up a large office space. The total cost needed to set up the space with computer and the respective software is $17,000. With a markup of 20% the selling price will be $20,400(see markup calculation for details). The margin percentage can be calculated as follows:

Margin Percentage = (20,400 – 17,000)/20,400 = 16.67%

Using what you’ve learned from how to calculate your margin percentage, the next step is to download the free Pricing for Profit Inspection Guide. Easily discover if your company has a pricing problem and fix it.

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