Parcel Grove Assembly

The apparent customer loss is an allocation problem—not the exit benefit

For the representative month, company revenue of USD 150,000 less USD 90,000 of direct, avoidable costs leaves USD 60,000 contribution, a 40% contribution margin. Fixed operating overhead of USD 48,000 leaves USD 12,000 operating profit, an 8% margin. The demanding account produces USD 40,000 revenue, USD 28,000 avoidable costs and USD 12,000 contribution. Allocating USD 16,000 of overhead to it creates a reported USD 4,000 loss. The other accounts generate USD 110,000 revenue, USD 62,000 avoidable costs and USD 48,000 contribution. Dropping the demanding account without replacement would therefore reduce company operating profit to zero if all USD 48,000 of fixed overhead remains. Avoidable costs comprise purchased kit components, packaging, cancellable temporary labor and outbound freight; permanent salaries and occupancy remain in overhead.

Inspection constrains throughput, but replacement work must fit every stage

Monthly workload versus practical staffed capacity is 140/180 hours for receiving, 620/680 for assembly, 360/360 for inspection and 240/280 for dispatch. These capacities allow for routine breaks and downtime. The demanding account consumes 180 inspection hours for 6,000 kits, while the other 12,000 kits also consume 180 hours. Its contribution is therefore about USD 67 per inspection hour, versus USD 267 for the other accounts. That difference suggests a mix problem, but it does not prove that equivalent replacement demand exists. Any replacement order must be checked against receiving, assembly, inspection and dispatch requirements, as well as material availability.

Slow collection ties up cash even though the account contributes profit

The demanding account is invoiced on shipment and pays 60 days later; its USD 28,000 monthly avoidable costs are assumed paid at shipment. With steady shipments and simplified 30-day months, the account carries approximately USD 80,000 of receivables and requires roughly USD 56,000 to bridge two months of direct cash outlays before collection, excluding overhead funding. Moving to 30-day payment could reduce steady-state receivables by about USD 40,000 and the direct-cost funding requirement by about USD 28,000. Those are different views of the same timing improvement, not additive savings or additional profit.

Test a revised commercial package

Offer a renewal proposal combining clearer kit specifications, charges for customer-requested changes and a 10% price increase. At unchanged volume and avoidable cost, the increase would add USD 4,000 monthly contribution and raise company operating profit from USD 12,000 to USD 16,000. Treat this as a sensitivity case, not a forecast: test acceptance and model volume loss, discounts and additional service obligations before committing. Negotiate shorter payment terms separately so a cash improvement is not mistaken for a margin improvement.

Pilot inspection simplification before adding capacity

Run a four-week trial using approved reference samples, standardized component placement and first-kit sign-off. Test whether inspection time on the demanding account can fall from 180 to 150 hours per month without increasing defects, rework or customer complaints. Even if 30 hours are released, fixed payroll does not automatically fall and profit does not automatically rise. For illustration, 2,000 additional standard kits requiring 20 receiving hours, 100 assembly hours, 30 inspection hours and 30 dispatch hours would fit inspection but exceed assembly's existing 60-hour headroom by 40 hours.

Replace contribution gradually, not just revenue

Use a rolling 13-week cash forecast and a workload-based quoting sheet before reducing the account. Require signed replacement work with sufficient contribution, compatible stage-by-stage labor requirements and financeable payment terms. Under the current assumptions, a complete exit needs at least USD 12,000 monthly replacement contribution merely to preserve today's USD 12,000 operating profit, provided fixed overhead does not increase. Release commitments in stages and verify that materials, temporary labor and freight costs are actually avoidable; inventory write-offs, notice periods or added staffing could worsen the transition.