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In previous articles (Business, May/15 and Jun/15), we differentiated between overhead costs and production costs (classified in accounting as “cost of goods sold” and often abbreviated COGS); thought about profit as just another expense; and then saw how looking at gross margin makes it easier to analyze the overall profitability of your jobs. In this article, we’ll explore the concept of margin. Only by understanding margin can you set accurate volume and markup goals.
As an example, we estimated that our overhead costs for the coming year would be $32,000 and we identified $8,000 as a target net profit. That meant that we’d need $40,000 left over in gross profit when we finished producing work. That $40,000 could come from a variety of different sales volumes (A, B, C, and D in chart, below).