Implementation of a variable costing method to calculate the profitability of a production investment for a textile and clothing start-up

Abstract

PURPOSE: Production profitability is a key parameter determining the efficiency of the production part of the organization, i.e., how much and what resources it uses to generate income, which in this case is production. The aim of this publication is to show an author's method of using variable costing as a tool for assessing the profitability of a manufacturing investment for a textile and clothing start-up in pre-production planning. The lack of publicly available solutions for calculating the profitability of production is the reason for starting the research.

DESIGN/METHODOLOGY/APPROACH: The methodology is to use the leverage of the pre-profit factor on the sum of fixed assets and fixed costs for the first year of operation to calculate the amount of profit and determine the corresponding amount for production materials and production volume for a fixed actual unit production cost of two textile products and the selling price of each product.

FINDINGS: In the profitability of production, the fact that costs are appropriately included in the unit cost of production, as well as the previously mentioned items such as fixed costs, wages of the team or the amount we have to spend on renting commercial or production space, plays a particularly important role in whether the investment pays off.

PRACTICAL IMPLICATIONS: In this article, the author presents a model calculated in Excel to calculate the profitability of producing two products in a strategy of one basic and one luxury.

ORIGINALITY/VALUE: Original work on the practical application of variable costing method in pre-production planning.