David Krause1 · The problem of the surcharge base
Material overhead is charged as a percentage on the direct material costs. If the material drops out, so does the reference base — and with it the recovery of goods receipt, inspection, storage and handling. Yet the plant still performs these activities.
The same titanium housing, once produced complete, once as pure toll machining (material supplied free issue). The contribution-margin ratio seems clear-cut — and leads astray:
| metric | full production | toll machining |
|---|---|---|
| CM ratio (share of revenue) | 33.3 % | 53.6 % ✓ |
| CM per machine hour (bottleneck) | €179.00 ✓ | €99.26 |
By revenue ratio toll machining wins, by bottleneck hour full production does — by 45 %. Which of the two numbers counts decides between right and wrong orders. The article shows why it is the second.
| calculation path | cost of production | total cost | assessment |
|---|---|---|---|
| full production (chapter 11) | €131.94 | €158.93 | reference |
| naive: leave material out | €39.29 | €49.78 | handling not recovered |
| correct: handling flat rate 5 % | €43.54 | €54.79 | effort covered |
Customary is 2 to 5 % on the value of the free-issue material. For the titanium housing with €85 of supplied value that is €1.70 to €4.25 per part. What matters is to itemize the flat rate in the quotation — otherwise the customer assumes the free issue costs nothing.
2 · The fallacy of the contribution-margin ratio
| figure | full production | toll machining |
|---|---|---|
| net price per part | €182.77 | €63.01 |
| variable costs | €121.91 | €29.26 |
| contribution margin I | €60.86 | €33.75 |
| CM ratio | 33.3 % | 53.6 % |
| machine occupancy per part | 0.34 h | 0.34 h |
| CM per machine hour | €179.00 | €99.26 |
Toll machining looks distinctly better at 53.6 % — and yet it is not. Without material the revenue is smaller, so every euro of contribution margin weighs more heavily in percentage terms. What is decisive is not the share of revenue, but the contribution per bottleneck hour. And there toll machining is 45 % below full production.
In figures: one machine hour of full production would have to be replaced by 1.80 hours of toll machining to earn the same contribution margin. If cost center 210 were to fill its 3,393 hours exclusively with toll machining, the annual contribution margin would drop from €607,347 to €336,789 — a difference of about €270,000.
3 · When toll machining is nonetheless right
| situation | assessment |
|---|---|
| free capacity, no alternative orders | Yes — every positive contribution margin improves the result |
| material hard to source or highly volatile | Yes — the customer carries procurement and price risk |
| customer commits long-term | Yes — base load justifies a lower CM per hour |
| machine at capacity, full orders waiting | No — every hour displaces 1.80× the contribution margin |
| capital tied up in material is a bottleneck | Check — free issue relieves liquidity |
One point the contribution-margin calculation does not show: with free issue the customer finances the material. For the titanium housing that is €85 per part, so at a lot size of 500 that is €42,500 that need not be pre-financed. For a plant with tight liquidity this can be worth more than the higher contribution margin — but this trade-off belongs made consciously, not by accident.
4 · Contractual points that belong in the calculation
| point | costing consequence |
|---|---|
| scrap risk on the free-issue material | Without a clause, price it in: q × supplied value |
| excess free-issue quantity for scrap and setup parts | Otherwise production stops for lack of material |
| scope and remuneration of incoming inspection | Inspection time is manufacturing time, not overhead |
| free storage period and charge thereafter | Otherwise the toll machinist finances the customer's scheduling |
The scrap risk on the free-issue material. If a titanium blank worth €85 is lost in production and the toll machinist bears the loss, at a 3 % scrap rate that costs €2.55 per manufactured part — with a contribution margin of €33.75, a full 7.6 %.
