Our customers are experiencing large increases in the cost of sale. Technicians’ shortages had the cost of sale increasing but now it is increasing overnight as Technicians are contacted by your competition. As managers, we should also know what the rate of sale is (Overall effective labor rate) and the cost of sales.
Your overall effective labor rate is total labor sales divided by total flat rate hours for all categories of labor, customer pay, warranty, and internal accounts.
Here is an example:
| Hours: | Labor Sales | Hours | ELR | % Total | Labor |
| Customer Pay | $109,138 | 1,097 | $99.49 | 67.3% | $109,138 |
| Warranty | $35,185 | 313 | $112.41 | 19.2% | $35,185 |
| Internal | $21,975 | 221 | $99.43 | 13.5% | $21,975 |
| Total | $166,298 | 1,631 | $101.96 | 100.0% | $166,298 |
To figure out your cost of sale is easy if you know what you have paid out to your technicians, divided by total flat rate hours.
Tech | FRH | Old COS | New COS | COS | Production Bonus | Total Earning |
| Tech | 149 | 30.52 | $30.92 | $4,617 | $600 | $5,217 |
| Tech | 263 | $32.41 | $35.95 | $9,457 | $600 | $10,057 |
| Tech | 106 | $27.81 | $30.17 | $3,204 | $600 | $3,804 |
| Tech | 161 | $32.83 | $40.00 | $6,428 | $600 | $7,028 |
| Tech | 306 | $30.66 | $33.60 | $10,292 | $600 | $10,892 |
| Tech | 57 | $32.63 | $33.93 | $1,920 | $600 | $2,520 |
| Tech | 72 | $12.33 | $22.00 | $1,591 | $0 | $1,591 |
| Tech | 63 | $14.42 | $16.50 | $1,037 | $0 | $1,037 |
| Tech | 41 | $26.78 | $32.28 | $1,317 | $600 | $1,917 |
| Tech | 105 | $15.16 | $19.00 | $2,004 | $0 | $2,004 |
| Tech | 181 | $26.99 | $31.57 | $5,729 | $600 | $6,329 |
| Tech | 121 | $32.33 | $33.89 | $4,102 | $600 | $4,702 |
| Unapplied Time | $5,332 | |||||
| Total | 1626 | $38.39 | $51,698 | $5,400 | $62,430 |
Don’t forget to include your unapplied time.
With this information, you will be able to determine your effective labor rates by labor category.
| Hours: | Labor Sales | Hours | ELR | % Total | Labor |
| Customer Pay | $109,138 | 1,097 | $99.49 | 67.3% | $109,138 |
| Warranty | $35,185 | 313 | $112.41 | 19.2% | $35,185 |
| Internal | $21,975 | 221 | $99.43 | 13.5% | $21,975 |
| Total | $166,298 | 1,631 | $101.96 | 100.0% | $166,298 |
| CP Work Mix: | Labor Sales | Hours | ELR | % FRH | Labor |
| Maintenance: | $33,795 | 392 | $86.15 | 35.7% | $33,795 |
| Competitive: | $16,452 | 224 | $73.49 | 20.4% | $16,452 |
| Repair: | $58,890 | 482 | $122.18 | 43.9% | $58,890 |
| Total | $109,137 | 1,098 | $99.38 | 100.0% | $109,137 |
Now we need to determine your desired gross profit percentage. If your desired rate is 71% you will need an overall effective rate of $132.34.
| Labor Sales | x | Gross Profit | = | Cost of Sale |
| 100.0% | x | 71.0% | = | 29.0% |
The cost of sale divided by the desired cost of sale will give you your overall effective labor rate.
| Cost of Sale per FRH | ÷ | Desired Cost of Sale % | = | Required Effective Labor Rate |
| $38.39 | ÷ | 29.0% | = | $132.34 |
| Proposed | |||||
| CP Work Mix: | Labor Sales | Hours | ELR | % Sales | Labor |
| Maintenance: | $61,600 | 560 | $110.00 | 40.0% | $61,600 |
| Competitive: | $33,600 | 280 | $120.00 | 20.0% | $33,600 |
| Repair: | $99,988 | 560 | $178.55 | 40.0% | $99,988 |
| Total | $195,188 | 1,400 | $139.42 | 100.0% | $195,188 |
| Proposed | |||||
| Hours: | Labor Sales | Hours | ELR | % Total | Labor |
| Customer Pay | $195,188 | 1,400 | $139.42 | 70.0% | $195,188 |
| Warranty | $37,096 | 330 | $112.41 | 16.5% | $37,096 |
| Internal | $32,400 | 270 | $120.00 | 13.5% | $32,400 |
| Total | $264,684 | 2,000 | $132.34 | 100.0% | $264,684 |
- We offer custom solutions—not a “cookie-cutter” approach
- We have seen what works….and what does not work
- We have a passion for what we do
- We have a depth of knowledge and experience
- Long term support for our clients is just not about the oh mighty dollar
- Our “product” is your improvement
- We are a company of “ways”, we find a way to improve your business
