wgoetsch-ga:
The managerial accounting course presentation referenced by
answerfinder-ga is a great overview of the entire concept of cost
volume profit analysis. The reference to "margin of product" on slide
22, however, is not in the context that you are implying in your
question. In this presentation, the actual context is "the
[contribution margin] of [product A]" (brackets added to clarify
actual terminology intended by the author). The contribution margin,
defined on Slide 18, is simply the dollar amount difference between
the selling price, and the variable costs that went into making the
item sold.
An expansion on this definition may help answer your question
somewhat, though. Labor is looked at in several ways when looking at
the costs that go into making a product. "Direct labor" refers to the
actual amount that the factory workers are paid to make a single unit
of a product, based on the total number of units (and total pay of the
workforce) made. This is considered a "Variable cost", since the
amount attributed to each unit made varies depending on the volume.
There are, after all, usually some efficiencies that can be gained
from mass production of just about anything, whether it is cars,
drugs, or computers. The rest of the variable costs include materials
and power. "Indirect labor" refers to the amount paid to workers who
do not directly manufacture the products, but who are necessary to
ensure the operation of the company. This includes designers,
supervisors, administrative staff, and even the person who sweeps the
floors at night. This is often considered a "Fixed cost", because the
amount they are paid does not usually vary with the amount of goods
made.
When you have a surplus of labor, usually this means that the direct
labor costs will go down; you simply do not have to pay the workers as
much if there are more people looking for jobs than the number of
actual jobs. So, in a country like China, this (along with other
factors like cost of living) helps to keep the labor portion of the
variable cost at a lower percentage of the total variable cost than in
North America. Similarly, the indirect labor costs will be lower as a
percentage of the fixed costs, too. So, it would be fair to say that
pay levels in China help to improve the overall profit margins of
products made in China, versus identical products made in the US. The
percentage of the overall cost represented by labor is simply lower,
meaning that fluctuation in labor cost has less of an impact on the
margin in China.
One example is in the textiles industry. Cheap, mass-produced textiles
are almost always made in Third World countries now, because the cost
of the materials is extremely low, so labor represents a bigger
percentage of the overall cost. It pays, therefore, to seek out the
lowest labor rates possible to improve the contribution margin of the
product. For expensive textiles (such as some wools with diamond chips
woven into the thread), material cost is a much greater portion of the
total cost, so even the higher labor rates in North America or Europe
does not impact the overall cost of the product as much. For these
products, therefore, labor has less of an impact on the contribution
margin of the product.
Not sure if this is helpful to you for your question; perhaps you can
clarify your question somewhat so that a Researcher can help you.
Regards,
aht-ga
Google Answers Researcher |
