Tuesday, February 5, 2008

The Margin. Part II.

What is our margin at ZMO?

Good question. Or rather, questions. Susan responded to my latte challenge by correctly inquiring, “Which margin do you want? Our plan margin? Our actual margin last closed week of fiscal year? Our margin through the holiday? Today's?”

If that makes you confused, it gets worse. Remember the definition of margin: The money that’s left over after we pay all variable expenses required to get a box out the door. That means margin changes with every box. An example:

Box A has one Ultimate Basket. Price is $200.
Box B has one Gold Label Balsamic. Price is $200.

Box A has over 20 items that need to be picked, checked & placed in a basket.
Box B has one item that gets picked, checked & placed directly in a box.

Looking at production labor alone, it’s clear the variable expenses required to get these two boxes out the door will be different. That means the margin for each order will be different. We'll ship 80,000 boxes this year. Does that mean we have 80,000 margins? In a way, yes. But don't freak out. We have a way around it.

It’s useful to recall our goal here. We’re trying to use margin to decide what the benefit is to shipping one more order. The order is in the future. We don’t know what it is yet. We have to predict it. How can we do that? Why not use an average of what happened in the past? It's probably as good a predictor as anything.

Here’s how to calculate our margin, using costs averaged over the period from August to December 2007. These are the final numbers off our December year-to-date financial statement. The real deal.

38.22% Cost of Goods including food and mistakes, subtracting shipping income
10.62% Direct Labor
1.00 % Payroll Taxes on Direct Labor
6.96 % Operating Overhead including credit card fees, etc.
3.09 % DSE Fees
4.40 % ZSN Fees

64.29% Total of all variable costs

35.71% ...is Our Margin (100% total - 64.29%)

So who guessed closest? The latte goes to Jason who said 42.3%. Congrats. I’ll bring it to you next week.

If anyone would like a try at Latte No. 2, here’s my next pop quiz. You know our margin in percent. What's is our margin in dollars? You pick your average box size. Show your math. One winner, chosen at random from correct entries.

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