Finding the maximum amount of profit you can get from one unit of a product is called Margin Potential. This is useful for a company when making a decision about whether to go into production or not. In it’s simplest form, it is calculated as: Margin Potential = Maximum Price - Minimum Unit Costs
Price
Use the information table below to find the maximum price that customers deem acceptable. You can find this in the Customer Buying Criteria for each segment.
Minimum Material Cost
Calculate the minimum Material Cost per segment using the following equation and table below:
Minimum Material Cost = [(Lowest Acceptable MTBF * 0.30) / 1000] + Trailing Edge Position Cost
Minimum Labor Cost
Calculate the minimum Labor Cost for each segment. Assume a base labor cost of $11.20 ($11.20 is a rough estimate of labor cost used solely to illustrate the Margin Potential Concept).
Minimum Labor Cost = [$11.20 - (1.12 * Automation Ratings Below)] + 1.12
Customer Segment Information
Trailing Edge Material Cost Leading Edge Material Cost Lowest Acceptable MTBF Maximum Price Automation Level (out of 10)
Low Tech $1.50 $8.50 14,000 $35.00 10.0
High Tech $4.00 $10.00 17,000 $45.00 6.0
Margin Potential
Product Name Maximum Price Minimum Material Cost Minimum Labor Cost Contribution Margin ($) Contribution Margin (%)
Low Tech
High Tech