- 01
The situation
Management knew overall margin had dropped roughly four points across two years and could not attribute it. The costing method was a single overhead percentage applied to every line, set years earlier, never revisited, and by then unrelated to how the plant actually ran. The proposal on the table was an across-the-board price rise.
- 02
What we found
Costed properly, the range split sharply. The high-volume commodity lines that management assumed carried the business were making very little once real conversion cost, wastage and handling were allocated. Two low-volume specialty lines were producing a disproportionate share of contribution. A third line had been loss-making for over a year, protected by the flat overhead rate that spread its cost across everything else. Margin had not fallen because of price. It had fallen because sales mix had shifted toward the lines that earned least.
- 03
What we did
We built an activity-based costing model reflecting actual machine time, changeover, wastage and handling by product. We produced contribution and net margin by line and by customer, and a margin bridge quantifying how much of the four-point fall came from volume, price, mix and input cost separately. We modelled targeted repricing on the weakest lines and the effect of discontinuing the loss-maker, including the overhead that would not disappear with it.
- 04
What changed
Management replaced a blanket price rise with targeted action on specific lines and customers, and now sees monthly margin by product rather than in aggregate.
The lesson
An across-the-board price rise is what a business does when it cannot see which products are the problem. Costing that reflects how the plant actually runs turns a blunt decision into a precise one.
