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What is the overhead cost of a CMC

John Golden

CGF II, Certified Grumble Framer Level 2
About a year ago I purchased a new Valiani CMC. I am very pleased with the machine but am concerned that I am not capturing the true overhead cost of this machine in my costing structure. I know what I paid for the machine, and I can calculate the cost of the capital. What I don't know is what is the anticipated life of the machine... 10 years...10,000 cycles...??? Has anyone calculated this? Any input would be appreciated..
 
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In Corner
For accountancy I’m writing my Val down over five years (20% per year), however I do expect that it will last a bit longer.
 

John Ranes II CPF GCF

SGF, Supreme Grumble Framer
Good Question...

This might make an excellent survey (hint, hint, Mike), but might take a couple of surveys as they no longer handle mutlitple questions.

1) It would be interesting to survey "Renters" to see how long the rented their first CMC in years before "Renting" a newer model.

2) It would be interesting to survey "Renters" to see how long they rented their first CMC before purchasing a second? a third?

3) It would be interesting to survey Buyers/financed Leasers how long they had their first CMC before moving onto their second?


We actually had our first CMC (F-6100) from 1999 - 2008 and sold it to another shop. We honestly could have kept going with it for another 4-6 years I estimate, however we wanted a key feature on the Valiani (8ply) so purchased our second CMC after 9 years.

I think our accountant amortized it over 7 years.

John
 

Rick Granick

SPFG, Supreme Picture Framing God
I believe that if you have the income to offset it, you can now just expense a piece of equipment up to $25K rather than depreciating it.
:kaffeetrinker_2: Rick
 

John Golden

CGF II, Certified Grumble Framer Level 2
John,
After 9 years of use, how many mats do you think the machine had cut...
 

John Ranes II CPF GCF

SGF, Supreme Grumble Framer
Indeed...

John Golden said:
John,
After 9 years of use, how many mats do you think the machine had cut...
I would guess we're talking under 45,000 mats. How many mats cut and how dilligent your staff is on mantainance are key factors on the life of a CMC.

John
 

John Golden

CGF II, Certified Grumble Framer Level 2
Thanks for the info John. If you pay $15,000 for the CMC. Cut 45,000 mats. Sell the unit for $5000. Your net cost per mat is 22 cents. Then you factor in that you had $15000 of capitol invested for 9 years. If you had earned 5% on $15k for 9 years you would have earned $8500 interest. That's another 19 cents per mat. That works out to about 41 cents per mat. Of course maintenace costs would also need to be added in but would not likely make a big change in the cost.
 

Thedra

CGF II, Certified Grumble Framer Level 2
It doesn't matter what we think or know, the IRS tells us the accounting life of our equipment. Two paths are available to us. Section 179 states that up to a total of $250,000 of equipment can be depreciated in the year it was purchased. This is usually only done in a year with huge profit that needs expense to offset taxable income. As I have been reading the many threads in the grumble I don't feel there are too many of us in this catagory! The other path is Five Year Property as the CMC is regarded as computer and computer peripheral and the purchase price can be divided equally between five fiscal years and is more in line with real world experience.

Don't forget... when five years is up and you have fully depreciated the CMC, if you decide to sell it, the FULL SALE PRICE is taxable income!!! :shrug:

Tom

As with all tax advice given in this forum, check with your Tax Adviser before taking any of our words!!
 

HB

SGF, Supreme Grumble Framer
It doesn't matter what we think or know, the IRS tells us the accounting life of our equipment....
If we read John's post, he is not concerned about what the gov't thinks he should be amortizing his equipment, nor should he. I believe too many businesses fail because they listen too much to the gov't and the accountant! They have their points of view, very worth listening too, but a business owner needs to analyze the numbers a lot differently then ONLY from a tax perspective. Here is the original question - a good one BTW:

...but am concerned that I am not capturing the true overhead cost of this machine in my costing structure. I know what I paid for the machine, and I can calculate the cost of the capital. What I don't know is what is the anticipated life of the machine...

.................................................................................................................


...If you pay $15,000 for the CMC. Cut 45,000 mats. Sell the unit for $5000. Your net cost per mat is 22 cents. Then you factor in that you had $15000 of capitol invested for 9 years. If you had earned 5% on $15k for 9 years you would have earned $8500 interest...
I like your figuring John - wise! Not enough people consider the capital investment & consider how much they could have made if the capital was invested elsewhere, rather than in a machine. Its not inconceivable for a $20,000 machine to set you back $50,000, in time. If its your business, you should do the math!
 

Thedra

CGF II, Certified Grumble Framer Level 2
I have no problem with your way of thinking but if you want to "Capture the true overhead cost" this is a fixed cost and not a variable cost. As such you are being taxed is such a way and that is the cost. Buy figuring it any other way you will place not enough costs against profit for the first five years and therefore not be making as much as you think. As such any financial planing will be skewed. If your know what will be going on six years from now let us in on it but in this economy we are lucky to forecast the coming year! If your pricing is to reflect real costs, these figures are the ones you need to use. Doing it any other way will reduce your costs and drive your prices down at a time that you are over budgeting your profits. Not a nice scenario!! These are only points to ponder.

Tom
 

John Golden

CGF II, Certified Grumble Framer Level 2
Thanks to all of those that have repsonded to my question. My goal is to know my costs as accurately as possible. I evaluate costs for everything. How much does it cost to print a 13" x 19" photo on my epson printer? Ink, paper, life of the prrinter, etc. I want to know my absolute true costs so that I can accurately price my orders. It helps me sleep better at night. I can guarantee you that our big box competitors can tell you to the fraction of a penny what it cost to mat and frame a picture.... I am sure that the majority of my fellow grumblers feel the same way.
 

Jim Miller

SPFG, Supreme Picture Framing God
... I want to know my absolute true costs so that I can accurately price my orders...
So far in this thread, has here been any discussion of labor cost? If so, I missed it. In my shop -- and presumably in most others -- direct and indirect labor cost exceeds every other cost in the shop.

The way you arrange your tasks has a significant impact on cost. For example, if an employee costing $18/hour (wages, plus benefits, plus administrative load) stands and watches the CMC cut a day's batch of mats, the cost would be much higher than if he/she prepares mat blanks or puts away leftover pieces while the machine operates.
 

wpfay

Angry Badger
For example, if an employee costing $18/hour (wages, plus benefits, plus administrative load) stands and watches the CMC cut a day's batch of mats....
Yeah, but it would be an anomaly since that cost would only be incurred for one day, if that ;-)

Good thread. Does the overhead figure in to the mat cost or into some other aspect of the job (fitting perhaps). The CMC takes up floor space so there is a $/sf charge (even the underlayment has a cost). It consumes electricity (minimal, I know, but still...). If you are burning through 10K mats a year, how many blades do you use? Do you take into account the savings by not having to have as much staff or someone on staff skilled enough to cut mats like Brian Wolf? (I figure my CMC saves me about 1-1.5 labor hours per hour of use).
 

CAframer

SGF, Supreme Grumble Framer
I want to know my absolute true costs so that I can accurately price my orders. .
I'm all in favor of knowing as much as you possibly can about cost structure, however there is also the law of diminishing return to consider.

Let's say you buy a sheet of 32x40 matboard for $8.

Let's say you sell a 16x20 mat with a single opening for $16.

Let's say after a quick check with competitors it seems that $16 is about right for the market

And let's say you had previously determined that your CMC cost could be allocated at 30 cents a mat.

Now you stumble across new information and realize that (forgetting about complex issues such as whether or not you are at full capacity) your CMC's full absorption cost is 40 cents a mat.

Your normal mat multiplier has been x8, and that we've determined is consistent with market.

Your actual P&L expense has not changed, just your allocation. The market has not changed.

So armed with the new allocation information do you charge not the $16 for the 16x20 mat that you always have but now $16.80 (the increased allocation times the standard multiplier added to the old price)?

Conversely what if you had detemined that the allocation was less than you originally thought. Would you reduce price below market?

I'm not throwing out barbs here - I'm genuinely interested in the thought process.
 

John Golden

CGF II, Certified Grumble Framer Level 2
If I was at full capacity (I wish), I would not change the price. If I were not fully abosorbed (reality) I would lower the price. I would do this to try and capture more of the market. Personally, I take 25% of the cost of the sheet of mat board, cost = $2, add in my shop rate for the time to produce the order, and add in overhead. I would run at this price unless my costs changed or demand was outstriping capacity. If this happend I would decide either to increase capacity or increase price to control demand.
 

JFeig

SGF, Supreme Grumble Framer
John, I get the impression that you have a little accounting education under your belt as do I.

It is all well and good to have. It is also a bit of overkill to cost out a process when we are not a factory, but a custom service operation. We are not consistent in our production rates. One week might be 30% and the next week might be 140%. As long as we price so that we "have covered most situations" we will be OK. As you will recall from school.... the price is elastic to the customer with respect to what work load you have in the shop.

While this analogy of the printing business in not perfect...... it works to a certain extent. If the presses are not turned on and operating, no one is making money.
 

CAframer

SGF, Supreme Grumble Framer
So do you price all/most jobs on a cost plus basis?

If so do you have standard times for labor and OH?

If so how do you measure/adjust standard hours?

Or do you periodically extrapolate cost based adjustments to a general pricing policy?
 

John Golden

CGF II, Certified Grumble Framer Level 2
I spent 27 years in manufacturing. I have been programmed to look at cost in this manner. I do take material cost + labor + overhead to determine pricing. I adjust pricing when one of these elements changes. As I have yet to see myself in a "full capacity" mode, I have not been lucky enough to have to decide to raise prices to control demand.
 

couture's gallery

PFG, Picture Framing God
I think you need to consider the reduction in labor costs to come up with your figure... like our CMC replaced one full time framer and those associated expenses, and should you not consider that in the equation?/
 

John Golden

CGF II, Certified Grumble Framer Level 2
My labor has been reduced because I now use the CMC. So the customer benefits because the labor charge is less; however, the overhead now has to include the CMC. The customer will still win, and I win because I cut better mats and have infinite choices to sell the customer. The decrease in labor charges is more than the additional overhead. If you have a shop rate of $40 per hour and your average frame job requires 1 hour labor, you bill the customer $40. If you put a piece of equipment in and refine the process and now that same job takes 45 minutes. Do you reduce your customers cost $10? You need to look at what it cost you to reduce the time and make sure you cover that in your new cost. You may end up with a $5 cost reduction to pass along to the customer. This still depends on your supply vs demand.
 

Bandsaw

MGF, Master Grumble Framer
Yeah, but having a CMC is so darn much fun!

12 years, 2 CMC's, and I'm going to buy another one because it can cut a new type of mat that I've always wanted to cut and you can put a pen on it, and .........

I can get a job working for the man and make a living, framing has to be fun - that's why I've done it for more than 30 years.
 

Framing:

In Corner
Not yet, I'm hoping to buy it in the new year, money is not the issue, just time, I have to much on at present to get stuck into it, that said I understand from a beta user that it is very good.

I worked for company years ago that did some box making, so I have a little knowledge of that area of business and some of the potential markets that the Valiani M3 applications could meet.

http://valiani.com/accessories_detail.php?ID=14
 

Kirstie

PFG, Picture Framing God
Thanks for the info John. If you pay $15,000 for the CMC. Cut 45,000 mats. Sell the unit for $5000. Your net cost per mat is 22 cents. Then you factor in that you had $15000 of capitol invested for 9 years. If you had earned 5% on $15k for 9 years you would have earned $8500 interest. That's another 19 cents per mat. That works out to about 41 cents per mat. Of course maintenace costs would also need to be added in but would not likely make a big change in the cost.
How much did that mat cost to cut in labor before you purchased the CMC? What's the difference? How much added business has the CMC brought in because you can now cut such beaituful mats? Has your CMC increased or decreased your waste factor? Are your employees faster using the CMC? What is the time difference? I don't have time or patience for such calculations but I'm interesed in reading yours. I'm a marketing, sales and design person, not a number cruncher. All are necessary for a successful, business but we've been winging it for 32 years. Here's how my CMC brings in extra money. But it's main function is as a labor saving workhorse.
 

John Ranes II CPF GCF

SGF, Supreme Grumble Framer
Additional food for thought

Kirstie said:
...I'm a marketing, sales and design person, not a number cruncher...
Yeah, but she loves seeing the numbers! :thumbsup:

What isn't factored into this numbers analysis (which is a valuable exercise), are those premium mat charges that are generated because your business has a CMC. For example we upcharge for reverse bevels, multiple opening mats, 8ply mats and lettering...items that are more often executed because because we own a Valiani CMC.

There is no question in my mind that these are mat designs that we would have discouraged prior to 1999 (pre CMC).

John
 

JFeig

SGF, Supreme Grumble Framer
John is right.... having a CMC gives you additional sales @ no additional cost that would not have been realized if you did not have the machine. That could be an offset to your cost of ownership calculations (sort of like 'Value Added").

I also noted that you are translating (mixing and or) variable costs with fixed costs. If you cut zero mats or 100,000 certain costs are the same = fixed costs. Variable costs include supplies, labor, and some maintenance(wear and tear on the machine increases as does the number of mats cut - to a certain extent).

There are also other factors that are hard to calculate into a dollar factor:
procession of a CMC
less reworks
the reduction of labor - including using a lower skilled employee to operate
repeatability of an old job
"I can have that done while you wait"
turning scrap into sellable products for almost no cost
getting jobs that you would not get if you did not have a CMC
 
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