Cost of the Product.

The practice of disregarding the profit, when considering changes in machine equipment, is the natural outgrowth of the separation of the mechanical and the business departments.

The changes in the equipment are usually determined by the mechanical department, and this is done with particular regard for the quality of work and the cost per piece.  The relation between the profit and the net labor cost is not considered.

The cost of the product of the average machinery-building plant may be divided into three nearly equal parts:  the material, the labor, and the burden; or, in four equal parts, if a reasonable interest charge is made for the use of the capital invested.

The material is the iron, steel and other material that enters into the construction of the machine, and it is taken in the condition in which it usually comes to the machine shop.

The burden includes all expenses and salaries necessary for the maintenance of the business.

About one-half the amount paid for labor goes to the men who run the machine tools, and the other half is paid to workmen who do the other work, such as handwork, assembling, transporting, etc.  Therefore, the cost of machining is either one-sixth or one-eighth of the total cost.

On top of the net cost of the product there should be a profit.  If it is not there, the sooner something happens the better.  If it is there, then it is proportioned to the volume of the output.  Therefore, both the size of the output and the labor cost should be kept in mind.

The size of the profit per unit of output is not generally known to the mechanical departments.  But even if it is not known, there is no reason for their being uninformed as to the importance of large output for cost of the plant.

Largest Profit Per Dollar Invested.

One of the most satisfactory policies of management is that which tends toward getting the best return or profit per dollar of investment.

We shall not refer to the quality of the product, the design, or any other elements which affect the good name and standing of the business, for it goes without saying that no business can be maintained where these are disregarded.  The point to be brought out here is that, These thing being equal, the best scheme of management for profit is one that puts the capital where it will do the most good.

The above statement is one with which all will agree, but strangely enough there has been a tendency to tie up capital in ways that actually throttle the output of the entire business.

Furthermore, this is frequently done by increasing the portion of the investment that is irrevocably tied to the existing product, thus not only reducing the earning power of each dollar invested, but also increasing the hazard by tying the capital to the present product, which soon may be unsuited to the market demand.