Garage door industry magazine for garage door dealers, garage door manufacturers, garage door distributors, garage door installers, loading docks, garage door operators and openers, gates, and tools for the door industry.
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48 International Door & Operator Industry™ Using Breakeven for Planning & Direction Finally, to illustrate how breakeven may be used for managerial planning purposes, it is informative to test two "what-if" scenarios on the data outlined in Exhibit 5. First, we will test what would have happened if the 2012 GM% generated by Up&Down; Garage Doors, Inc. had been 10% greater? Second we will test the results of reducing inescapable expense by 10 percent. For sake of brevity we will dispense with all but the fnal calculations, so reason through each scenario as outlined above if the numbers do not immediately make sense. What if GM% had been 10% greater? (everything else remaining as noted in Exhibit 5) $ 725,000 $ Breakeven Volume = Inescapable Op Expence .30206 Margin Revenue % $ Breakeven Volume = $ 2,400,195 70.6% of actual 2012 volume EBITDA = $ 302,000 61.5% Increase What if Fixed Expense $ had been 10% less? (everything else remaining as noted in Exhibit 5) $ 659,091 $ Breakeven Volume = Inescapable Op Expence .2682 Margin Revenue % $ Breakeven Volume = $ 2,457,137 72.3% of actual 2012 volume EBITDA = $ 252,909 35.2% Increase The overarching importance of Gross Margin is demonstrated by this comparison of "what if" tests. Increased margin produced a more pronounced EBITDA improvement than a similar decrease in fxed expense. Indeed, small margin changes inevitably have a more salutary impact on business results than almost any other positive improvement. Of course management cannot arbitrarily cause margins to increase by 10%, nor can fxed expense be simply cut by 10% without signifcant competitive consequences. The point of the exercise is to demonstrate how small changes may be tested as management seeks to improve a frm's performance. Such improvement is often centered on modifying the product mix, which is the subject for concluding our examination of margin. MANAGEMENT (continued from page 46) The Product Mix and Margin Mix The business model of any enterprise is governed by the composition of its product or market mix. That composition may be viewed as concentrations or segments of customer demand, usually defned by the products sold to each. For example, we may differentiate market segments by referring to "the commercial rolling door segment" as distinct from "the commercial sectional door segment" or "the residential service segment". Most business models encompass multiple market segments, which combined are defned as the frm's product or customer "mix". Therefore, a logical part of management control should be continuous measurement of the comparative success (or lack thereof) of the various product mix components. Obviously, Gross Margin dollars and percentages provide an excellent basis for comparative analysis. Exhibits 6A through 6D display the performance of each component of Up&Down; Garage Door's product mix. The sum of the components comprises the total income statement presented above as Exhibit 4. The comparative sales, cost and margin data displayed in Exhibits 6A through 6D is mandatory information for strategic planning and competitive positioning in the increasingly competitive garage door marketplace. Unfortunately too many dealerships do not evaluate product mix segments, and thus fail to appreciate the wide contribution disparity that is typically present. Worse yet, without product mix analysis, knowing which segments warrant additional capital and talent and which deserve reduced emphasis or abandonment altogether becomes guesswork. Typically, the data presented in Exhibits 4, and 6A through 6D, would be aligned across a wide spreadsheet to facilitate examination. Publication constraints necessitate the formatting employed here, and the abbreviation of individual segment details. Items not shown in the segment displays such as inventory changes and payroll burden are in place, but not visible. While perusing the Gross Margins generated by Up&Down; Garage Doors, please remember that the data is not presented as either industry standards or prescribed targets. The details of your product mix may be substantially different because your strategy refects the conditions of your market, which is probably quite different from that of Up&Down.; In the interest of brevity, we will limit our scrutiny of the foregoing data to a few lines, although the wealth of information generated by comparative contribution analysis can fll many spreadsheets. The word "contribution" from the preceding sentence is important, because that's what segment analysis is really all about. Continued on page 50 1/24/14 10:51 AM