Arkansas HVACR NewsMagazine April 2018

S tate, National, Chapter News Feature Story

How to Departmentalize The service technician may spend 65% of his time doing service, 10% doing start-ups, and 25% doing replacements. You must do this percentage estimate with all of your direct labor employees. 1. Add up all the annual direct labor dollars for each department. 2. Add up the total of all departments direct labor dollars. 3. Divide the total direct labor dollars into each department’s total. This will give you a department percentage of direct labor. 4. Multiply each overhead expense (rent, insurance, utilities, etc.) by the department percentage. (continued next page)

for contractor/owners is about $36,500 per year. It was recently reported that, among businesses doing about $750,000 per year, the owners’ salaries averaged $40,000 per year. To price a job correctly, you must know “cost of sales,” which includes equipment, materials, direct labor, subs, warranty reserve, and permits. (See Table 1). TABLE 1 If the cost of a sale is $3,906, and your replace-ment department overhead is 28%, and your desired net profit is 8%, use the divisor method: A. 28% + 8% = 36% B. 100% – 36% = 64% (your divisor) C. $3,906 = $6,103 (the correct selling price) Proof: Multiply correct selling price ($6,103) x overhead (28%) = $1,709 Cost of sales ($3,906) + overhead ($1,709) = ($5,615) Selling price ($6,103) – (cost + overhead) ($5,615) = Net Profit ($488) Net Profit ($488) / Selling price ($6,103) = ($488) or 8% The selling price covers both the overhead and the desired net profit. (The unknown in the equation is department overhead)

If you keep doing what you are doing, You’ll keep making the same money . Bill Ligon