leverage effect of adding employees

The typical wholesale craft business is a true cottage industry, generally consisting of a full-time craftsperson whose spouse helps out part-time. In our scenario the family business produces 3,000 craft widgets a year at a wholesale price of $25. Let's say it takes a half an hour to make one of these, and the craftsperson is paying himself a "notional" wage of $12.50 per hour, as outlined in other FACQs. The income statement might look something like this, including the "notional" wage in direct cost:

 
 Dollars
Units
Percentage
Revenue
$75,000
$25.00
100
Direct cost
-37,500
-12.50
-50
Margin
37,500
12.50
 50
Overheads
-18,750
-6.25
-25
Profit 
18,750
 6.25
25
Family income
$37,500
 $12.50
 50

This is an okay income level, but I'd hate to buy a house and send the kids to college on it. Our crafts family decides to hit the big time by hiring some employees or contract workers. For the sake of argument, let's say three cheerful but clumsy helpers are hired for this new production studio called Crafts 'R' Us. No one can do things as well as the original artist, so let's assume these helpers are only eighty per cent as efficient as the craftsperson, and that they are paid $10 per hour. A quick calculation tells us that they will produce an additional 9,600 craft widgets in a year. Our income statement then looks something like this:

 
 Dollars
Units
Percentage
Revenue 
$315,000
$25.00
100
Direct cost
-157,500
-12.50
-50
Margin
157,500
12.50
50
Overheads 
-78,750
-6.25
-25
Profit
78,750
6.25
 25
Family income
$97,500
$7.75
31

Wow! That's an extra $60,000 in the bank before tax. And not only that, the workers received a decent wage (roughly $20,000 a year) so they are happy, too. Our crafts family can now start living the American Dream. That is, assuming that the personality, motivation and perspicacity is there to manage this production studio at this level of activity. Feel free to review other FACQs to discover what it takes to run a monster like this. The rewards are there, but so are the headaches and the stress.

 

   
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