Question

Mr. Northman runs a moving business. He currently charges $5 per mile and $4 per square foot when quoting prices. Unfortunately, this results in wide variations in his gross profit margin. He wants an average gross profit margin of 25.67% without wide variations. Give Mr. Northman an excel tool that he can use for future quotes.

floors	Total Mileage	Square Footage	Quoted Price	Direct Costs - Actual			Gross Profit
				Labor Hours	Labor Cost	Gas cost
							Amount	%
73	98	1,150	$     5,090	88.15	$3,966.75	$245.00	$   878.25	17.25
54	90	1,210	$     5,290	85.35	$3,840.75	$225.00	$1,224.25	23.14
46	33	1,570	$     6,445	95.45	$4,295.25	$ 82.50	$2,067.25	32.08
52	37	1,750	$     7,185	105.85	$4,763.25	$ 92.50	$2,329.25	32.42
73	53	1,020	$     4,345	76.40	$3,438.00	$132.50	$   774.50	17.83

I figured that he should start using the amount of floors the movers have to travel up and down in his quote as well. I’m having a hard time but I assume it would be a good idea to do a correlation between the inputs and his actual labor cost and then to make a formula off of that. Any idea how to do this? Or any other ideas on how to reduce variations in his gross profit by quoting customers better?

Answer 1

You started with a correct approach, but in this question you should consider labour hour (Not floor change) as a substantial factor for quotation.

As the labour cost has a direct correlation with the number of floor also in these kind of business as the floor rises the time for movement will increase, resulting in additional cost and LOW GROSS PROFIT %.

In the Question, Points to be noted are below:-

- Labour cost is directly related with labour hour which is 45/ hour in all the situation.

- Gas cost is directly related with Total Mileage which is 2.5/ Km in all the situation

Refer the image to understand the factors which should be consider for getting the gross profit margin of 25.67%

At the end we end up with 3 factors, where as business man is considering only two factor for qoutations.

My suggestion will be to consider one more factor in the business decision of qoutation i.e Labour Hours.