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SMT007-Oct2021

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OCTOBER 2021 I SMT007 MAGAZINE 87 "Wow! e increase in profits is too much to believe," he said. "I ran a model—based on our most common product, which sells for $115.50—and the results were amazing. Gross profits would go from $2.79M to $5.29M on one line. It doesn't seem possible." "It's likely correct," Patty commented. "Who can tell me why?" Chuck seemed hesitant, but Patty gave him an encouraging look. "Go on Chuck," Patty said. "Well, we are producing more product and all of the product is at a reduced price," Chuck explained. "Precisely," Patty said. Everyone in the room was impressed that Chuck grasped the concept first. "For those of us that are dummies, could one of you explain this?" John implored. "Let me try, with a sim- ple example," said Patty. "Let's assume we make 1,000 units at a cost of $95 and a sell price of $100. We make 1,000 x $5 = $5,000. Now we increase pro- ductivity so that we pro- duce 33% more so we have 1,333 units to sell. Howev- er, our fixed costs such as labor, rent, and machine amortization have not changed. We might have a little more cost in electric- ity, consumables, and ma- chine repair, but these are second order effects. Our unit cost might go to down to $92. Profits are now 1,333 x $7 = $9,331," Patty explained. "So, we have more units to sell, and all of them are cheaper to make," Maggie concluded. "Precisely," Patty replied. "Of course, we have to have the demand to buy the extra product," Frank warned. "Not to worry, folks; we have been turning away orders," John said, excitedly. "is situation is what e Professor calls 'e Law of Exponential Profits.' With in- creased productivity, each unit produced is cheaper to make and you have more of them, so profits increase exponentially," Patty ex- plained. Figure 1: Frank's calculations of the profit improvement if the line runs during the lunch hour. Figure 2: The cost breakdown of a PCB that sells for $115.50. The top column is before the line is run during the lunch break and the bottom column is after the line is run during the lunch break. Note that the labor cost per board (circled) went down $2.90 ($14.339 – $11,429) and machine amortization produced another $0.83. These two accounted for the bulk of the reduced cost.

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