Al robson

e will be closing the book on the year 2001 very soon and in some ways not any too soon. The horrendous events on 9-11 have changed life in America forever. Furthermore, all the economists are now using the dreaded word “recession.” The drycleaning industry has been flat for more than a year and September was in the sewer. The good news is that October and November are beginning to rebound and the prospects for 2002 are looking better for this industry.

As retail sales continue to slump and unemployment continues to rise, drycleaners will clean more pieces. Americans are becoming more serious about the important things in life. With this seriousness, we are seeing

more suits and ties on TV. This is good news for drycleaners.

So what should you be doing now to be better prepared to increase your bottom line in 2002? With an increase in piece volume, it is critical to know how to calculate your actual cost per piece. With accurate information about your costs, you are well positioned to price your services to ensure profitability.

The following examples describe how to calculate how much it costs you to actually process: 1) a piece of drycleaning; and 2) a man’s dress shirt.

Pieces are important because they provide a constant measure. Pounds of drycleaning fluctuate with the seasons and your product mix. In addition, dollar volume fluctuates with price changes, discounts and your product mix. A piece is always a piece. You will need to project the number of drycleaning pieces and the number of shirts you will do in a specific time period.

When calculating your cost per piece, you must first separate your direct costs from your indirect costs. Direct costs include: direct labor (all production personnel); direct supplies (invoices, tagging tickets, etc.); and packaging materials (hangers, poly, tissue).

Direct labor can be expressed or defined as a constant cost per piece. As piece volume fluctuates from day to day, your direct labor cost per piece should not fluctuate. Production personnel should only work and get paid for the work that is available for them to do.

Your shirt department is required to process 90 shirts per hour on a double buck with two collar/cuff machines and a sleever with two operators. Note: When there are no shirts the operators go home.

With your operator processing 90 shirts per hour and with an average hourly wage of $8.10 per hour per operator, your cost per shirt at pressing is 8.10, divided by 90 = .09 x 2 operators = $.18 per shirt.

Calculate the cost of inspection assembly and bagging (IAB) for shirts (includes inspection, 8% touch ups, replacing buttons, assembly and bagging).

At the rate of 65 shirts per hour, we know it will take 1.38 hours to process 100 shirts at this operation. To calculate the cost per shirt, multiply the hourly rate of your IAB person by 1.38.

If the person is being paid $7 per hour, your cost for 100 shirts will be 1.38 x $7 = 9.66, divided by 100 shirts equals $.097.

The next direct labor cost is wet cleaning and starching the shirts. The wetcleaning department should sort, wash and starch 200 shirts per labor hour.

This figure represents labor hours, not machine hours. Note: your washing machines, drycleaning machines and dryers are the only automated pieces of equipment in your plant. Even a steam tunnel is not automated because you have to feed it one piece at a time.

The cleaning and starching of shirts will take .50 labor hours to process 100 shirts. If your wash operator is being paid $8 per hour, multiply .5 times 8 = $4. Divide $4 by 100 shirts and it will cost you $.04 to clean each shirt.

Thus far, we have the following direct labor costs to process a shirt;

Other direct costs are hangers and poly. In a recent survey of my active clients, the average cost per 18" shirt hanger is $.04155. The costs range from $17.95 to $23.60 per box of 500.

The range in prices is determined by the quantity purchased, location (how far from the distributor), how much other business you do with the distributor, and the terms (how you pay your bill). Most distributors will give you a 2 percent discount when you pay your bill within 10 days of delivery.

This gives us total direct labor costs of $.317 and hanger costs of .0416, or $.359. You can calculate your poly, tag and invoice costs.

Now, project how many drycleaning pieces and how many shirts you will process in January 2002. Note: for most drycleaners, the number of shirts and the number of drycleaning pieces is close.

For this example we will use 6,000 pieces for both drycleaning and shirts in January. Here, shirts represent 25 percent of dollar sales and drycleaning is 75 percent of dollar sales.

Does that mean that shirts should carry 25 percent of the indirect costs, or should they carry more because total shirts equal total drycleaning pieces?

To answer, let’s look closer at counter labor.

Counter labor in drycleaning is considered a fixed cost because your customer service reps work the hours that the store is open regardless of the amount of work that comes in. For a location that takes in 1,400 pieces of drycleaning and 1,400 shirts a week, what is the counter labor cost per piece?

For the month of January, you project that you will take in a total of 6,000 drycleaning pieces and 6,000 shirts.

On average, your counter people take in, invoice, tag-in, rack and hand out 100 pieces per hour. That 100 pieces per hour includes the time when there are no customers to wait on, which means it will take one hour for 100 incoming pieces and one hour for 100 out-going pieces.

With an average hourly counter wage of $7.50 per hour, it will cost $7.50 to take in 100 pieces, or $.075 per piece.

Since that is half the transaction (incoming), it will cost the same amount when the customer picks up for a total counter labor cost of $.15 per piece.

Now, to the “what ifs.”

What if sales in January are up or down 20 percent? Your counter must be attended every hour you are open. When no customers come in you cannot send your counter personnel home. This is why your counter labor is an indirect cost that must be re-calculated monthly.

As your piece volume goes up and down your cost per piece at the counter goes up and down.

This same principal applies to rent. If your rent is $3,600 per month for your plant, including the call office, how much rent should you allocate to each piece?

Quite simply, that depends on your piece volume.

Let’s estimate that drycleaning takes up 60 percent of your plant’s square feet and 60 percent of your call office square feet. This leaves 40 percent to be allocated to shirts.

In January, you project a volume of 6,000 pieces of drycleaning and 6,000 shirts. Rent is $3,600 (.60 x 3,600 = 2,160).

By dividing 2,160 by 6,000 pieces of drycleaning, we can project that rent will cost $.36 per piece in January for drycleaning.

Furthermore, we can project that rent will cost $.24 per shirt in January (3,600 x .40 divided by 6,000 shirts = .24).

When your piece count increases by 20 percent to 7,200 drycleaning pieces and 7200 shirts, your per piece cost for rent will go down to $.30 for drycleaning and $.20 for shirts.

Conversely, if your piece count goes down 20 percent to 4,800 pieces, your per-piece cost for rent in the accounting period (usually one month) will go up to $.45 for drycleaning and $.30 for shirts.

Insurance, supplies and utilities can also be treated like rent.

The difficulty comes in when you are on the cash method of accounting. With this method, you post the expense for these items when you pay the bill, not when you consume the supplies or utilities.

For this reason you should look at the past 12 months to calculate total supply costs and total utility costs. Divide those expenses by the total number of drycleaning pieces and the total number of shirts. This will tell you what your costs were in the past, which will give you the ability to project your future costs for these items.

Using the above examples, you can now determine your actual cost per piece for utilities, supplies and additional overhead expenses.

Once you know your average cost per drycleaning piece, proceed to calculate how much, on average, you need to charge to make your desired profit.

For example, to realize a 20 percent profit, divide your per piece cost by .80. For a 25 percent profit, divide by .75 and for 30 percent, divide by .70.

I always close this column… in the game of business the more you know the better you can play the game.

Well, knowing what it costs you to process a piece of drycleaning/shirt is basic to playing the game like a pro!

Go for the gold in 2002!