In My Business magazine, accountant Andrew Fielding outlines the importance of ensuring that any work you win is going to be profitable, even if it’s a low profit. Marginal costing is an important tool that businesses can use to monitor cost overruns or determine the additional costs required to produce increased sales volumes. This can lead to management making better decisions on their costs, volume levels and ultimately on the sales price and associated revenue.
Businesses that understand the impact of volume on their production and sales are in a much better position to compete and price their products effectively. The typical warehouse or manufacturing plant will have a maximum volume capacity based on current resources. If sales volumes exceed this level, the company might have to incur costs associated with additional staff, new premises, new internal systems or outsourcing. These additional costs represent the marginal costs associated with increasing your sales volume.
In the race to win work, many businesses submit tenders or quote well below the actual cost of completing work. These so called ‘loss leader’ products or projects might endear you to a new customer, but they can backfire quickly. It is important to remember that the lowest tender doesn’t always win and the more discounting of quotes you do, the more the market will expect your lower price.