March 10, 1921 



HARDWOOD RECORD 



19 



By Wm. A. Babbitt 



General Secretary, National Association of Wood Turners, Inc. 



The problem presented by the proposed new price levels is not 

 at all as simple as some loud shouting buying interests would have 

 us, who have to stand the gaff, believe. 



The assumption is that if materials fall say 25 percent, and if 

 wages contract a similar percent, then the factory cost falls 2.5 

 percent also. 



We may say, in passing, that the manufacturer who lets the buyer 

 do his cost figuring certainly has no right to complain at the result 

 the buyer shows by his figures. But we maintain that this pro- 

 cedure puts too great a strain on the morals, to say nothing of the 

 intelligence, of Mr. Buyer, to recommend it for general practice. 



Let us look again at a general example made up on the Standard 

 Cost Formula. 



Eaw materials cost $10.00 



Direct labor for the job 10.00 



Overhead 200 percent on direct labor 20.00 



Total $40.00 



In this formula, it must be remembered that all figures are 

 assumed and that the overhead percent is taken arbitrarily at 200, 

 and that actually this figure will vary with the individual plants, 

 probably within the limits of 180 to 275. Overhead percent is 

 ratio of all expenses of doing business other than direct labor, to 

 the direct labor. 



To return to the discussion: If the cost of raw materials drops 

 25 percent and other costs remain the same, then obviously the 

 cost drops to $37.50, or 6)4 percent. 



But suppose the cost of labor drops 25 percent, what happens 

 then? A lot of things that no one ever thought of until recently. 

 It looks on the face of it, that this cut in wages might nip off 

 another $2.50 from the cost. But the fact is that it is quite as 

 likely to add a bit to the cost. 



You have to consider two outstanding variables or hazards of the 

 manufacturing process. 



Cost Hazard of Speeds 



In the first place, there is the cost hazard of speeds. A cut in 

 wages always has a tendency to slow down the production speeds 

 of the plant. It discourages some workers and makes others surly. 

 So every manufacturer must study the net result, rather than the 

 face figure of every cut in wages. 



In the second place, you must consider the matter of overhead. 

 It is hard to see how anyone who fails to pivot all his expenses on 

 his direct labor is going to answer this question, viz., of the effect 

 of a wage reduction on his overhead. 



If it were possible for you to go right down the entire list of 

 items in your expense account, and slash the whole list for a 25 

 percent reduction, all would be well. Tour 200 percent overhead 

 would fall to 150 percent, and your factory cost would fall the 

 25 percent which the buyer demands. 



But it is more likely that your overhead percent will not go 

 down. It will almost certainly go up, or at best, remain constant. 



Look at the items in your list. Fully half of them are accounts 

 that cannot be cut, but are bound to be higher, such as taxes, 

 insurance, depreciation, sales expenses, many kinds of supplies and 

 the like. Then there is the matter of salaries. Are you cutting 

 your own salary 25 percent, and your bookkeeper and your factory 

 manager, and so on down the line? There does not seem to be 

 much in the overhead to cut except the wages of unskilled labor, 

 which procedure appeals much more keenly to your customer than 

 it does to you. 



If you leave your overhead substantially intact, then your over- 

 head ratio is going to climb nearly enough to wipe out your wage 



cut. Your overhead ratio expresses the relation between the amount 

 you pay the men who conduct the actual manufacturing operations 

 in your plant, and the amount which it costs to give the supporting 

 service which makes these manufacturing operations possible. 

 Must Fully Keduce Overhead 



You will at once see that unless your overhead is reduced to 

 match the other reductions of wages and materials, you will be a 

 long way from securing the desired reduction in cost. Assuming 

 that your overhead remains intact, and your overhead is 200 

 percent. As this is the ratio of expense against ten-dollar labor, 

 you perceive that against seven-fifty labor, the percent immediately 

 leaps to 267 percent. 



Furthermore, when we come to study the lumber, we find that 

 our raw material prices cannot be reduced. It is true that there 

 are bargains just now for buyers who dare to buy. But as soon as 

 buying starts, lumber will immediately resume the price level which 

 its scarcity and cost of production will inevitably command. In 

 most cases the increased cost of freight fully offsets the decreased 

 costs of lumber. 



Let us set up the cost formula again. To be very conservative, 

 we will grant that labor can be counted on for the coming year at 

 25 percent lower wages. Let us assume that sufficient reductions 

 in the wages of supporting labor can be made to effect a net drop 

 in overhead. We cannot concede that lumber can be figured at 

 lower costs. 



Now 



Raw materials $10.00 



Off 25 per cent labor 7.50 



Off 15 pts. overhead (252 per cent) 18.90 



Before 



$10.00 

 10.00 

 20.00 



Total cost $36.40 $40.00 



This study is given to enforce the lesson that the man who 

 dares to make a price reduction of 25 per cent until he has proven 

 that he can effect the necessary reductions in every item of cost 

 in his overhead as well as in his labor and materials is taking the 

 kind of hazard from which the good Lord is said to protect only 

 children and fools. 



Save by Efficiency 

 On the other hand, just see what happens when instead of cut- 

 ting wages and the standard of living of j'our employees, you go 

 after them and get an average 30 per cent more production per 

 man on the same outlay of overhead. 



Let us assume that the cost of $40 represents the total expense 

 involved on a day's run of ten hours. If your operator is able to 

 complete this ten-hour job in seven hours, you have gained three 

 hours of direct labor, or $3. You have further gained the over- 

 head on this labor, or $6, making a total gain of $9. Your cost 

 formula will show as follows: 



Eaw materials $10.00 



Direct labor 10.00 less $3.00 



Overhead 20.00 less 6.00 



Totals • $40.00 



9.00 gain 



Net cost $31.00 



In other words, the 30 per cent increase in production, without 

 any reduction in wages or of overhead, earned enough saving in 

 wages and extra distribution of overhead to give you the base for 

 a 22% per cent price reduction. A careful trimming of expense 

 accounts should enable you to take care of the remaining 2% 

 per cent. 



