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Calculating The Costs of A Second LineBy Walter McDonaldCalculating the cost of carrying a secondary line includes several steps. Both direct and indirect costs should be taken into consideration, and the evaluation should conclude with a strategic assessment of “critical mass.”
Companies that don't sufficiently focus their resources do not achieve the critical mss essential to be successful in their primary line. The question becomes: Would management be better off investing time spent on the secondary line than dedicating this valuable time to building more critical mass in the primary line?
Secondary lines can become an enormous management distraction and energy leak. The cost of this deterioration of focus on the critical mass is a strategic issue. Unless there is sufficient management focus and critical mass, even the primary line could be at risk in the market.
STEP # 1: The process begins with the documentation and calculation of annual direct and indirect costs in each department that can be attributed to the secondary line:
STEP #2: Project the total gross profit generated from each revenue center that can be directly attributed to that secondary product line.
STEP #3: The secondary product line “contribution” is calculated by subtracting direct and indirect costs from gross profit generated by the secondary line.
STEP 4: Critical Mass is the management concept related to the value of focus. Companies that don't sufficiently focus their resources do not achieve the Critical Mass essential to be successful in their primary line. The question becomes: Would management be better off investing time spent on the secondary line than dedicating this valuable time to building more Critical Mass in the primary line? |
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