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Issue link: http://read.dmtmag.com/i/83158
Since there are no costs of goods associated with producing labor income, every dollar earned is considered 100-percent gross profit. Technician's wages are accounted for in budgeted operating expenses as part of payroll. Step 11 Let's measure the cost impact of adding the second technician. A. Transfer the department's cost of operation as defined in Step 10, Item C: B. Enter the same cost used for technician number one as defined in Step 10, Item A: C. Add lines "A" and "B" to determine department's cost of operation with two technicians: D. At your current hourly labor rate ($70), how many customer billing hours are required to pay the break-even cost of operation? $112,655 $37,000 $149,655 2,138 hours Math: Enter into your calculator the increased service department applied hard cost from Step 11, Item C ($149,655), and divide by the hourly labor rate ($70). Number of hours will be revealed. E. Two technicians operating efficiency ratio (TOER) is: 59.38% Annual hours available for billing: 3,600 hours Math: Enter into your calculator the number of break-even hours billed to customers (2,138 hours), then divide by 3,600, representing available hours for billing customers (two technicians). EXAMPLE: Profit analysis and efficiency ratios Technician minimum acceptable operating efficiency ratio (TOER) is 50 percent. It's acceptable to some dealers to operate with a TOER of 55-60 percent. When a shop is operating with a TOER of 60 percent, the profit window will shrink by 10 points. These 10 points represent a loss of 28.57 percent in the profit window. Indeed, that's a large chunk of profit potential. Math: Enter into your calculator 10 (points) and divide by 35 (points). Answer: 28.57 percent of profit dollars. Step 12 Should two technicians not be able to produce positive cash flow, in excess of paying department cost of operation, it's time to add the third technician. A. Transfer the department's cost of operation with two technicians as defined in Step 11, Item C: B. Enter the same cost used for technician number one as defined in Step 10, Item A: C. Add lines "A" and "B" to determine department's cost of operation with three technicians: D. At your current hourly labor rate ($70), how many customer billing hours are required to pay the break-even cost of operation? E. Three technicians operating efficiency ratio (TOER) is: Annual hours available for billing: $149,655 $37,000 $186,655 2,666 hours 49.37% 5,400 hours Math: Enter into your calculator the number of break-even hours billed to customers (2,666), then divide by 5,400, representing available hours for billing customers. EXAMPLE: Suggested allowance for measuring Technician Operating Efficiency Ratio (TOER): Technician will work a standard 8-hour day for 5 days: Annual payroll hours, 40-hour work week multiplied by 52 weeks: Allocated Hours Subtract time off for 2-week vacation: Subtract time off for 1-week sick leave: Subtract time off for 6 holidays: Subtract hours allocated to company (equipment setup): Subtract total allocated hours from 2,080 payroll hours: What can these numbers tell us? Case history model's current hourly labor rate: How many customer billing hours are required to many hours are available for billing to customers (3 x 1,800): Required technicians' operating efficiency ratio (TER) to pay break-even operating expenses: Billing 3,200 hours to customers at $70 per hour earns: How many labor dollars will be earned with the department working at 70-percent technician operating efficiency ratio (TOER)? Seventy percent of 5,400 hours is 3,780 hours billed at $70 per hour: Raising shop hourly labor by $10 generates an additional: Billing at 85-percent efficiency of 5,400 hours is to Continued on page 38 OUTDOOR POWER EQUIPMENT SEPTEMBER 2012 17 $264,600 $37,800 That's equal to billing 3,780 hours at $80 per hour: $302,400 Difference between cost and earnings going to the bottom line: $78,400 40-hour week 2,080 hours 80 hours 40 hours 48 hours 112 hours 280 hours Technician annual hours available for billing to customers: 1,800 hours $70 pay service department's break-even operating expenses? 3,200 hours Using information from the preceding table, how 5,400 hours 59.25% $224,000 Let's take a quick study of what we have learned on the subject of cost impact as we continue with the issue of how to establish a fair market hourly labor rate from cost center to profit center. Case History Model These numbers reflect a case history from our consulting file. Our model is typical of a dealership with annual sales of $1,500,000.* The following are real numbers from the voice of an audience of more than 100 business owners and service managers who were attending a workshop. These business owners and service managers were from dealerships located on the Mid-Atlantic coast. Using our case history model, we will present the numbers as previously outlined in this series. *We assume these numbers that were brought forth at the workshop. Service department share of applied hard cost, using Part 1: Equipment cost only from Step 6 (Part 2: Creature comfort for technicians not applied): Payroll for three technicians costing $50,000 each: Total department cost of operation (by adding two previous lines): $74,035 $150,000 $224,035