The contribution margin can then be used to calculate your break-even point. This is done by dividing your fixed costs by the contribution margin.
Break-Even Point = Fixed Costs / Contribution Margin
Break-Even Point = Fixed Costs / (CM2 – CM1)
a snapshot in time and tell you about the overall health of your business.
The income statement shows us our ability to make a profit, sales volume, and the nature of various types of expenses. The balance sheet is used to estimate the business’s cash, debt, and equity positions. The statement of cash flows report on cash receipts and payments. Business owners use these tools to make investment, credit, or tax decisions.
For many of us they are difficult to understand and can’t be used on a daily basis to manage our shop. Don’t get me wrong, these are important concepts and tools. Accountants, bankers, investors, and some math nuts love them. But they are outwardly focused and report on where you’ve been. As a small business owner I want to know where I’m going. For this, we need cost accounting, sometimes referred to as managerial accounting.
As the name suggests, cost accounting is for managers. Small business owners can use Contribution Margin and other tools to determine their break-even point, quote prices for custom work, improve efficiency and productivity, calculate their profitability by product, product line, or by customer, and forecast growth. The tools advise them on the most appropriate course of action to take based on their costs and capabilities. This level of detailed cost information is necessary to control current operations, and plan for the future.
The difference between financial and cost accounting is how they classify and treat costs. Financial accounting classifies costs as either direct costs (cost of goods sold) or indirect costs (overhead). Cost accounting ushers in new terms; fixed costs and variable costs.
Fixed costs need to be paid whether you have one work order or a hundred. Rent, utilities, equipment, advertising, insurance, or technology can all be classified as fixed costs. They remain relatively fixed regardless of how busy you are. Variable costs, on the other hand, will go up or down based on production volume. They vary according to your workload and include such items as direct materials, direct labor, supplies, and even shipping costs.
Some fixed costs are necessary and cannot be avoided. Others may be optional. If you choose to add fixed costs you are making a conscious decision to increase your break-even point. The more you raise your break-even point the harder it will be to make money. If demand for your work is high, that might not matter, but if you are just starting out, it could make all the difference.
Let’s put cost accounting in action to answer a common question. Should I do all the tanning myself, or send everything to a tannery? If you do the tanning yourself you will be adding fixed costs when you buy equipment and tools. You will also be adding variable costs in the form of tanning supplies and labor. If you use a tannery all your fixed costs are turned into a variable cost. Your overall cost will go up or down depending on how busy you are. Remember, we are only concerned about variable costs and how they contribute to our profitability.
The two tanning options below are for a $600 whitetail shoulder mount. I am using $20 an hour for my labor. The rest of the numbers are estimates only. You will need to use your actual costs. They will be specific to your situation.
Out-source Tanning = (tanning cost, shipping, administrative, other?)
$20.00 Labor - Administrative (1 hour - Record keeping, punching hide, shipping/receiving)
$43.85 Shipping (both ways)
$46.50 Tanning service
$25.00 Turning & Fleshing service
$135.35 Total variable cost
Calculating the difference between variable costs will give you the same answer. My estimated costs show that I am making $9.10 more by doing the tanning myself. Or $9.10 contributes to paying for fixed costs and making a profit.
First, we need to calculate the contribution margin for each option.
$9.10 = Variable Cost2 ($135.35) – Variable Cost1 ($126.25)
Cost of Fleshing Machine
1,050.00 Dakota V Flesher - Table Combo
85.85 Spare Parts (Blade, belt, bearings)
40.00 Labor (2 hours - Assembly / Setup time)
79.86 Sales Tax
1,305.71 Total cost of Fixed Asset
My break-even point will be the total cost of the flesher divided by the difference between variable costs. (Always round up to the nearest whole number even if it is less than half). My estimated costs indicate that I will need to mount 144 whitetail deer to justify the purchase of the fleshing machine. Over time I may mount more than 144 deer. If so, then I’ll start to see a return on my investment, specifically, $9.10 per animal.
By using cost accounting and contribution margin you can make operational and investment decisions more easily. We used these new methods to determine our break-even point and return on investment for a flesher. Your answers can help you decide if you should buy a fleshing machine in anticipation of work, or send your hides to a tannery when you actually have work. Both options can make financial sense based on your level of revenue or workload.
JOHN JENNINGS owned Heads or Tales Taxidermy, LLC and now he and his wife run Taxidermy Direct, LLC., a cloud-based business software for the full and part-time taxidermist. Our software is mobile friendly and lets you focus on your passion by helping you to get organized, work smarter, and promote your business. We take a business approach to running a taxidermy studio and strive to help you reach your own financial goals.
To learn more about Taxidermy Direct® or to sign up for a free 30 day trial visit www.taxidermy-direct.com.
Who doesn’t remember the vintage Reese’s® commercials that aired in the ‘70s and ‘80s? Two people, one eating chocolate, the other peanut butter, turn a corner and walk into each other. Their two ingredients mix and they come up with what we now know as the Reese’s Peanut Butter Cup®, two great tastes that taste even better together.
Financial accounting and cost accounting are the Reese’s® of small business and taxidermy. Financial accounting provides the rules and structure to record financial information. If you cringe at the thought of bookkeeping then you are well aware of what financial accounting is. It is the day to day record keeping of financial transactions that form the basis of income statements, balance sheets, and statement of cash flows. These reports are
Contribution Margin (CM1) = Selling Price – Variable Cost1
Contribution Margin (CM2) = Selling Price – Variable Cost2
In-house Tanning = (chemicals, supplies, labor, other?)
$21.25 Chemicals (Quart tanning solution)
$5.00 Supplies (Gloves, salt, scalpel blades, etc.)
$80.00 Labor - (4 hours - Tanning)
$20.00 Labor - (1 hour - Turning lips, nose, ears)
$126.25 Total variable cost