David Krause13.1 Separating variable and fixed costs
Variable costs arise with every unit: material, direct labor, energy, consumable tooling. Fixed costs occur whether production runs or not: depreciation, interest, space costs, salaries. The machine hour rate contains both — which is why it has to be split for contribution margin accounting.
| Component | €/year | Character | Reasoning |
|---|---|---|---|
| Imputed depreciation | 51,462 | fixed | time depreciation, runs independent of use |
| Imputed interest | 18,398 | fixed | capital commitment |
| Energy | 30,435 | variable | arises only during machining |
| Maintenance | 22,000 | 50 / 50 | maintenance intervals partly time-, partly runtime-dependent |
| Consumable tooling | 18,500 | variable | wear per cut |
| Space costs | 16,530 | fixed | floor area independent of utilization |
| Σ variable | 59,935 | = €17.66/MH | |
| Σ fixed | 97,390 | = €28.70/MH | |
| Σ MHR | 157,325 | = €46.37/MH | |
13.2 CM I and CM II
The reference quantity is cost center 210 at full operation: 3,393 productive machine hours, loaded with orders of the titanium-housing type (0.34 h occupancy per unit). That gives about 9,980 units per year — a model calculation that exhausts the capacity exactly.
| Item | €/unit | % revenue |
|---|---|---|
| Net revenue (cash price) | 182.77 | 100.0 % |
| − MEK Ti6Al4V | 85.00 | 46.5 % |
| − MGK (9.0 %, material-related) | 7.65 | 4.2 % |
| − DL production | 9.60 | 5.3 % |
| − DL CAM | 1.15 | 0.6 % |
| − MHR variable (€17.66/MH × 0.34 h) | 6.01 | 3.3 % |
| − SEKF special mill | 4.20 | 2.3 % |
| − SEKF fixture | 4.80 | 2.6 % |
| − SEKV free delivery | 3.50 | 1.9 % |
| = Σ variable costs | 121.91 | 66.7 % |
| = Contribution margin I | 60.86 | 33.3 % |
Fixed cost per unit: RGK 3.77 + MHR fixed 9.76 + VwGK 15.57 + VtGK 7.92 = €37.02. Variable costs 121.91 + fixed costs 37.02 = €158.93 — exactly the total cost from Chapter 11. And 182.77 − 158.93 = €23.84 profit. Both calculations describe the same part.
| Item | €/year | % revenue |
|---|---|---|
| Net revenue (9,980 units × €182.77) | 1,824,045 | 100.0 % |
| − Variable costs (9,980 × €121.91) | 1,216,662 | 66.7 % |
| = Total CM I | 607,383 | 33.3 % |
| − Fixed costs CC 210 (9,980 × €37.02) | 369,460 | 20.3 % |
| = CM II | 237,923 | 13.0 % |
A comparison with the BAB is worthwhile. The cost center's own fixed costs (RGK €91,218 plus fixed MHR share €97,390 = €188,608) are covered by this order type only to about 72 %.
The reason lies in the part's structure. The RGK surcharge of 35.1 % is calibrated to an annual volume of €260,000 direct labor. But the titanium housing ties up only €10.75 of labor per unit — at 9,980 units that is €107,285, i.e. 41 % of the calculated labor volume. The machine side, by contrast, is covered at 100 %: the 3,393 machine hours are fully loaded.
From this follows a practical rule: parts with high material and machine share but low labor share under-absorb their cost center's residual overhead. Whoever fills their plant exclusively with such orders covers their machines but not their staff organization. Full costing would not have shown this — it would only have reported that every unit brings €23.84 profit.
13.3 Make-or-buy: the classic fallacy
Many companies compare the buy price with the full costs of in-house production. That is wrong: on buying, only the variable costs fall away. The fixed costs remain — as long as the capacity is not actually reduced.
| Item | Make | Buy | Difference |
|---|---|---|---|
| Wrong: full-cost comparison | |||
| MEK + variable costs | €48.50 | — | — |
| Fixed costs (depr., interest, OH) | €61.50 | — | — |
| Full cost in-house | €110.00 | €95.00 | −€15.00 |
| → Conclusion "buy is cheaper" — and it is wrong | |||
| Right: partial-cost comparison | |||
| Variable costs in-house | €48.50 | — | — |
| Buy price (decision-relevant) | — | €95.00 | +€46.50 |
| → Make is €46.50 per unit cheaper — the fixed costs occur on buy anyway | |||
The calculation flips as soon as the capacity is actually reduced — machine sold, staff reassigned — or when the freed capacity can be filled with better-paid orders. Then the comparison figure is not the fixed-cost block but the forgone contribution margin of the alternative. Add to that the non-calculable criteria: know-how loss, supplier dependency, quality risk, responsiveness to changes.
13.4 Additional order below full cost: when yes, when no?
A customer offers €140/unit for the titanium housing from Chapter 11 — the calculated total cost is €158.93/unit. Decline? The answer depends solely on capacity.
| Item (CC 210) | without order | with order (€140, lot 500) | Δ |
|---|---|---|---|
| Utilization | 70 % (2,375 h) | 75 % (2,545 h) | +170 h |
| Revenue / year | €1,276,648 | €1,346,648 | +€70,000 |
| Variable costs (€121.91/unit) | €851,541 | €912,496 | +€60,955 |
| CM I | €425,107 | €434,152 | +€9,045 |
| Fixed costs (unchanged) | €369,460 | €369,460 | €0 |
| Operating result CC 210 | €55,647 | €64,692 | +€9,045 |
At €140/unit each part covers its variable costs of €121.91 and yields €18.09 of contribution margin. Since the fixed costs occur anyway, every unit above the variable-cost threshold improves the result — even though the price is below full cost. Conversely at full utilization: then the additional order displaces regular orders with a higher CM — here the relative contribution margin per bottleneck hour applies (13.6), and the order should be declined.
13.5 Break-even
= €369,460 / €60.86 = 6,071 units/year
equals 6,071 × 0.34 h = 2,064 machine hours
of 3,393 available hours = 61 % of capacity
Only from the 6,072nd unit does the cost center earn a profit. Below 61 % utilization it does not carry its own fixed costs — regardless of how well each individual order is calculated.
13.6 Contribution margin per bottleneck hour
CM I per unit answers the question "is this order worthwhile?". Once the machine is fully loaded, the question changes fundamentally: no longer "is A worthwhile?", but "A or B — which order gets the scarce spindle hour?". Here the per-unit contribution margin misleads.
| Order | CM I per unit | bottleneck time per unit | CM per bottleneck hour |
|---|---|---|---|
| A | €180 | 0.90 h | €200.00/h |
| B | €260 | 1.60 h | €162.50/h |
Order B, with €260, has the higher per-unit contribution margin and looks more attractive on the quotation sheet. Related to the scarce spindle hour, it clearly loses: A brings €200/h, B only €162.50/h. For every 100 bottleneck hours that run on A instead of B, €3,750 more contribution margin arises. Whoever prioritizes by per-unit CM when the machine is full gives money away.
When the machine is fully loaded, the short-term price floor rises above the variable costs: every accepted order displaces another. The displaced contribution margin per bottleneck hour must be added as opportunity cost. For the titanium housing the CM per machine hour is €60.86 / 0.34 h = €179.00/h — this value is also the right valuation figure for unplanned downtime, as used by the article on maintenance strategy.
13.7 Checklist
- 1Costs cleanly split into variable and fixed — including within the MHR?
- 2On make-or-buy, only the variable costs compared, not full cost?
- 3Checked whether the capacity can actually be reduced?
- 4When the machine is fully loaded, prioritized by CM per bottleneck hour?
- 5On additional orders: displacement accounted for? → 13.5
- 6Qualitative criteria documented, not just calculated?
Chapter 14 picks up the OEE from Chapter 7.2 again — this time as a management task: how do you measure downtime reliably, how do you prioritize improvements, and what does one percentage point actually bring?
