The situation
The plant runs 2,000 machine hours a month and has no more to give. Sales are steady, the order book is full and operating profit stays thin. The sales team is told to push the product family with the highest margin, enclosures, at 45%.
Margin percentage answers the question of how much each dollar of sales leaves. When the plant is full, that is no longer the question. The scarce thing is the machine hour, not the sale.
The same month, per machine hour
Divide each family’s contribution by the hours it uses and the ranking turns over. Enclosures leave $130 per machine hour, the lowest in the plant, and take 45% of all the hours. High-volume clips, with the lowest margin at 25%, leave $300.
| Product family | Revenue | Contribution margin | Machine hours | Contribution per hour |
|---|---|---|---|---|
| Custom brackets | $310K | 40% | 620 | $200 |
| Enclosures | $260K | 45% | 900 | $130 |
| Precision housings | $190K | 40% | 280 | $271 |
| High-volume clips | $240K | 25% | 200 | $300 |
| Total | $1,000K | 37.7% | 2,000 | $188 |
What one shift of hours is worth
Total contribution is $377K and fixed costs are $340K, which leaves $37K. Moving 200 machine hours from enclosures to precision housings would add $141 for each hour moved: about $28K a month, or 76% more operating profit, with the same plant and the same people.
That assumes the demand for housings exists and the machines can run both. Those are the two things to confirm before changing anything.
What management can do with it
- While the plant is full, quote and prioritize by contribution per machine hour, not by margin percentage.
- Raise the price or the minimum order on enclosures until an hour spent on them earns what the alternatives earn.
- Ask sales how much more precision housing and clip work is available, and at what price.
- Recalculate every quarter. The ranking changes when the plant has idle hours again.
The management questionWhat is our scarce resource, and which products earn the most from each unit of it?