Contract machining

The product we were selling at a loss without knowing it

Two product lines out of four were loss-making: only full cost showed it.

2 of 4
loss-making lines uncovered
+4.2 pts
average margin in 5 months
37%
of costs previously ignored
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Il contesto

A contract machining workshop, around twenty staff and a sizeable fleet of machines. Prices had always been set the same way: cost of materials, hours of direct labour, and a fixed mark-up decided by feel on top.

La sfida

The trouble is that calculation ignored everything else: machine depreciation, energy, set-ups, the hours of people who don't run the part but keep the place going. Real costs, paid every month, that never made it into the price. Some products looked like the most profitable precisely because they absorbed a lot of these 'invisible' resources. In the accounts the margin never added up, and no one knew where the loss started.

Il nostro intervento

  • We built the full cost of each line, allocating indirect costs to jobs with a consistent driver: the machine-hours actually used.
  • The same selling price was read at direct cost and at full cost, to show the gap between apparent margin and real margin.
  • Two lines turned out to be below zero once indirect costs were loaded: the work kept the machines busy, not the company profitable.
  • We repriced the loss-making lines and reviewed the mix, shifting capacity towards the jobs that genuinely covered full cost.
  • Full-cost calculation became a stable tool, used to quote new jobs instead of the mark-up by feel.

I numeri del caso

Margin by product line: at direct cost and at full cost
32%-14%0%32%21%Line A28%9%Line B25%-6%Line C30%-14%Line D
At direct cost (apparent)At full cost (real)

Same selling prices. Once indirect costs were loaded, lines C and D were loss-making: it simply wasn't visible before.

Make-up of full cost on a typical job
41%0%41%Materials22%Labour37%Indirect costs

37% of cost — machine depreciation, energy, set-ups, overhead — never entered the pricing calculation.

We were sure Line C was our flagship. We pushed it. In fact it lost us money on every part.

The owner

Il risultato

In five months the average margin rose by 4.2 points, without winning a single new customer: it was enough to stop selling below cost what looked like the flagship product. Today no quote goes out without full cost calculated, and the question on the shop floor is no longer 'how much do I mark up?' but 'does this job cover its real costs?'.

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