{"id":67797,"date":"2015-06-23T21:37:29","date_gmt":"2015-06-23T14:37:29","guid":{"rendered":"https:\/\/bahtera.jp\/marginal-profit\/"},"modified":"2025-03-19T15:54:33","modified_gmt":"2025-03-19T08:54:33","slug":"marginal-profit","status":"publish","type":"post","link":"https:\/\/bahtera.jp\/en\/marginal-profit\/","title":{"rendered":"True Story! Learning About Marginal Profit and Break-Even Point from My Boutique Management Experience in Bali"},"content":{"rendered":"

Costs can be divided into variable costs and fixed costs. The break-even point sales, which recover fixed costs, are determined by the marginal profit rate\u2014the ratio of the purchase price (variable cost) to sales. In other words, direct costing calculates how many clothes need to be sold to achieve the break-even point sales, considering only variable costs as the original cost.
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Cost Management in Indonesia<\/p>\r\n\t\t\t\t\t\t\t\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t

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Mass production factories, such as two- and four-wheeler parts manufacturers common in Indonesia, have multiple manufacturing processes. In such cases, processing costs are calculated for each process, and the method of aggregating these costs into the product is called process costing. In this approach, labor costs and manufacturing overheads are recorded at the end of the month by the accounting department, transferred to inventory assets, and then allocated accordingly. On the other hand, in factories producing custom-made items under individual order production, job order costing is used, where costs are aggregated by order number or project number. In this case, … <\/p>\n\t\t\t\t\t\t\t\t<\/div>\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t

\u7d9a\u304d\u3092\u898b\u308b<\/p>\r\n\t\t\t\t\t\t\t\t\t\t\t\t\t<\/dd>\r\n\t\t\t\t\t<\/dl>\r\n\t\t\t\t<\/div>\r\n\t\t\t\t<\/a>\r\n\t\t\t\t <\/p>\n

The Break-Even Point: No Profit, No Loss<\/h2>\n

Up until eight years ago, I ran boutiques in Ramayana Mall in Denpasar, Bali, and on Danau Tamblingan Street in Sanur. My strategy back then was a “time machine business,” taking advantage of the fact that “Jakarta trends arrive in Bali three months late.”
\nEvery month, I\u2019d buy the latest trendy imported Chinese clothing models from a wholesale store in Mangga Dua, Jakarta, ship them to Bali via DAKOTA cargo on the spot, and have them on display in the store within a week. Women\u2019s clothing, especially trendy items for ABG (Anak Baru Gede, or teenagers), is like perishables\u2014freshness is everything.
\nIn simple terms, the break-even point is how many items (or how much money) I needed to sell to cover rent and labor costs, reaching a state of “no profit, no loss.” <\/p>\n

\n
\n
    \n
  • Sales \u2212 Variable Costs = Fixed Costs<\/li>\n
  • Marginal Profit = Fixed Costs<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

    My wife handled purchasing and sales, I managed transportation and accounting, and the store operated on two shifts with five SPGs (Sales Promotion Girls). Each SPG\u2019s salary was 800,000 rupiah per person. Looking back, it feels pretty exploitative.
    \nAs the accountant, my first thought was: <\/p>\n

    \n
    \n
      \n
    • Use OMSET (sales revenue) to cover tenant rent of 7 juta and labor costs of 4 juta<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

      In reality, the tenant rent was prepaid for a year, so we wouldn\u2019t run out of cash by the end of the month, but I calculated it monthly as a fixed cost at month-end. Since we easily surpassed 11 juta in monthly sales, this was a breeze to clear.
      \nThe next thing to consider was: <\/p>\n

      \n
      \n
        \n
      • Use OMSET \u2212 MODAL (the purchase cost within the cost of sales), i.e., Profit, to recover tenant rent of 7 juta and labor costs of 4 juta<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

        This is where things started to get a bit tough.
        \nSince MODAL is “MODAL relative to OMSET,” it becomes: <\/p>\n

        \n
        \n
          \n
        • MODAL = Beginning-of-month inventory + Monthly purchases \u2212 End-of-month inventory<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

          This is exactly the variable cost (equivalent to direct material costs in manufacturing).
          \nClothes were generally sold at about 60% markup, so the profit margin was 0.4. Therefore, ideally: <\/p>\n

          \n
          \n
            \n
          • 11 juta \u00f7 0.4 = 27 juta<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

            You\u2019d need to hit around 27 juta in sales to reach the break-even point\u2014”no profit, no loss.” This 0.4 profit margin relative to the purchase price is called the marginal profit rate. \"The
            \nWell, that\u2019s an impossible game, so we settled at around 22 juta in OMSET and felt somewhat relieved.
            \nRunning a store lazily in warm Bali, you tend to forget the initial investment (the first year\u2019s tenant rent) and focus on clearing month-end payments with a bit of profit left over. But as the tenant rent renewal for the next year approached, reality sank in, and panic started to set in. <\/p>\n

            Sales Enough to Recover Fixed Costs<\/h2>\n

            The break-even point concept is about “the number of clothes or sales amount needed to recover monthly tenant rent and labor costs.” Essentially, it\u2019s about “at least generating enough sales to avoid a loss.” For a small retailer like us, it makes sense to use the profit generated instantly from sold goods (sales \u2212 variable costs = marginal profit) to cover the fixed costs that hit at month-end. <\/p>\n

            \n
            \n
              \n
            • Fixed Costs \u00f7 Marginal Profit Rate = Break-Even Point Sales<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

              This is called CVP (Cost Volume Profit) analysis, calculating the sales volume at the point of “no profit, no loss.” I\u2019m not too confident in the above calculation, so please point out any mistakes.
              \nThis “how much do we need to sell to recover fixed costs” discussion isn\u2019t directly tied to system implementation work, so it\u2019s an area system vendors might overlook. However, for system users investing from Japan into Indonesia, conducting production and sales activities, and struggling to recover their investment quickly, it\u2019s a critical issue.
              \nSystem vendors tend to focus solely on system development and implementation, but if they can\u2019t imagine the true purpose for the users, it becomes theoretical desk-bound nonsense.
              \nEven if it\u2019s hot, even if traffic jams cause back pain, or even if a rear-end collision leaves you inconvenienced for 10 days, visiting the field is what matters. <\/p>\n

              Increasing Direct Labor Time Ratio to Boost Productivity and Operating Profit<\/h2>\n

              We continued running the boutique in a Bali shopping mall for about two years.
              \nWith annual tenant rent around 100 juta and a six-person SPG team (800,000 rupiah\/month each), the monthly fixed costs came to 14 juta. Somehow, we managed to break even. <\/p>\n

              \n
              \n
                \n
              • Total Cost = Total Variable Costs + Total Fixed Costs<\/li>\n
              • Unit Price = Variable Unit Cost + Fixed Unit Cost<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

                The variable unit cost (clothing purchase price) remains constant regardless of sales, while the fixed unit cost (tenant rent + SPG salaries) decreases inversely with sales volume.
                \nWhen buying at 6 and selling at 10, the marginal profit rate is 0.4 (60% of the selling price). So, how much do we need to sell to recover the 14 juta\/month fixed costs? <\/p>\n

                \nBreak-Even Point at the Shopping Mall <\/p>\n
                \n
                  \n
                • 14 juta \u00f7 0.4 = 35 juta\/month in sales<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

                  After the Bali bombings centered in Jakarta reduced tourists to Bali, fixed costs (selling and administrative expenses) became a burden. After much deliberation, we relocated to Hardy\u2019s temporarily on Danau Tamblingan Street in Sanur.
                  \nAs a result, we reduced SPGs to two, tenant rent dropped to about 50 juta\/year, and fixed costs were cut to 6 juta\/month. <\/p>\n

                  \nBreak-Even Point in Sanur <\/p>\n
                  \n
                    \n
                  • 6 juta \u00f7 0.4 = 15 juta\/month in sales<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

                    However, Sanur back then was so quiet you could hear crickets, and despite the drastically lowered break-even point after the move, we barely managed to break even\u2014a sad situation (tears).
                    \nSo, I came up with a plan: use affordable turquoise, amethyst, and tiger\u2019s eye natural stones, string them with silver beads to add value, and sell them at a higher profit margin.
                    \nI melted down leftover silver inventory for Japan that had been sitting at home, reworked it into beads, and strung them with fishing line into necklaces and bracelets for display. Western aunties bought them like crazy, and we started making decent profits.
                    \nHere\u2019s the key point: by having idle SPGs make accessories like it was piecework, their salaries\u2014previously 100% booked as selling and administrative expenses for promotional work\u2014became direct labor costs due to the production time.
                    \nThis was equivalent to: <\/p>\n

                    \n
                    \n
                      \n
                    • Producing in-house to lower purchase costs and increase marginal profit<\/li>\n
                    • Converting selling and administrative expenses into direct labor costs for in-house production, saving outsourcing costs and boosting both gross and operating profit<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

                      In other words, “turning indirect labor time into direct labor time converts fixed costs into variable costs (purchase costs).” <\/p>\n

                      \n
                      \n
                        \n
                      • Marginal Profit (Gross Profit) = Sales \u2212 Variable Costs<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

                        SPGs producing at a lower wage rate than outsourced processing fees reduced variable costs. <\/p>\n

                        \n
                        \n
                          \n
                        • Operating Profit = Marginal Profit \u2212 Fixed Costs<\/li>\n<\/ul>\n<\/div>\n<\/div>\n

                          With the same working hours and cost (salary), increasing the direct labor time ratio boosted output and operating profit despite the same hourly wage rate. <\/p>\n

                          Managers Want to See Operating Profit by Department and Product<\/h2>\n

                          I ran my own business in Bali for about seven years, and the metrics I cared about daily were sales, cost of sales, and selling\/administrative expenses\u2014specifically, how much operating profit each product (or service) generated.
                          \nManagers inevitably want to see operating profit by department or product group, factoring in selling\/administrative expenses. Unless there\u2019s a mistake in manufacturing cost calculation leading to a loss, gross profit, which should naturally be positive, isn\u2019t a direct management metric.
                          \nHowever, when I returned to Jakarta and became a system implementation field worker, I tended to think of business systems functionally, deductively viewing the flow from procurement and production to inventory and accounting.
                          \nIn reality, Japanese company managers inductively trace from sales performance to inventory and procurement, needing breakdowns like departments or product groups.
                          \nHow you categorize items in a business system\u2019s item master depends on whether you prioritize inventory management convenience from a department manager\u2019s perspective or sales connectivity from a salesperson\u2019s or manager\u2019s viewpoint.
                          \nThe department master is based on the company\u2019s organizational chart, but if you want finer profit-and-loss management by section, you need to define departments more granularly.
                          \nConversely, you also need a common department to aggregate costs that can\u2019t be split by department. First, define system departments flatly as cost centers, then define higher-level consolidated departments for report output units.
                          \nWhen leveraging a business system from a management perspective, you must design the master data to aggregate accumulated data by necessary breakdowns and include them in transaction input fields. <\/p>\n

                          From Cost Center to Profit Center<\/h2>\n

                          When accumulating costs by work center, cost centers are often departments. Since only costs are aggregated without revenue, even highly profitable tasks or jobs with large costs tend to be avoided.
                          \nThus, turning cost centers into profit centers\u2014holding them accountable for both revenue and costs (profit and loss)\u2014optimizes departments to maximize profit, though partial optimization doesn\u2019t always lead to overall optimization.<\/p>\n","protected":false},"excerpt":{"rendered":"

                          Costs can be divided into variable costs and fixed costs. The break-even point sales, which recover fixed costs, are determined by the marginal profit rate\u2014the ratio of the purchase price (variable cost) to sales. In other words, direct costing calculates how many clothes need to be sold to achieve the break-even point sales, considering only variable costs as the original cost.<\/p>\n","protected":false},"author":2,"featured_media":79481,"parent":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[624],"tags":[],"class_list":["post-67797","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-cost-management"],"_links":{"self":[{"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/posts\/67797","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/comments?post=67797"}],"version-history":[{"count":0,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/posts\/67797\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/media\/79481"}],"wp:attachment":[{"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/media?parent=67797"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/categories?post=67797"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bahtera.jp\/en\/wp-json\/wp\/v2\/tags?post=67797"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}