IT Managers Need To Know How Many Is Enough

by drjim on December 13, 2012

IT managers need to know how many units need to be sold…

IT managers need to know how many units need to be sold…
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As an IT manager, we like to think of ourselves as being far, far away from the business side of the house. However, the reality is that the reason that we have a job is because the products and services that our IT teams help the company to build get sold. This means that you’re going to need to have to show some leadership and have a good understanding of what the difference between a successful and an unsuccessful product is.

What Makes A Product Successful

Before we start this discussion, I think that we should go back, way back, to the beginning. It costs your company money to make the products that its sells. There are two types of costs associated with creating each unit of a product that the company makes: fixed (you need to buy a printing press) and variable (you use so much paper and ink for each book that you print).

When you make one unit of your company’s product, it has three values associated with it. The first, of course, is the price that it will be sold at. The next value is the portion of that price that will be used to pay for the variable costs that were required in order to make the product. These had better be less than the price that you are selling the product at or otherwise you’re going to be losing money with every unit that you sell! Finally, a portion of the product’s price will be used to pay for the fixed costs that were associated with making the unit.

The ultimate question that both you and the company are trying to come up with an answer to is just exactly how many units does the company have to make and sell in order to break even on the investment that it has made in creating and selling this product.

How To Tell If A Product Is Going To Be Successful

The good news here is that it’s pretty straightforward to come up with an answer to this question – it’s a math problem. The basic equation looks like this:

Breakeven Volume = Fixed Costs / Unit Contribution Margin

Let’s say that your company prints and sells books. In order to print books it has made an investment in a $100,000 printing press. This money has been spent no matter if the company prints 1,000,000 books or none. That’s why we call it a fixed cost.

Now let’s say that the company sells each book that they print for $75. Assume that the variable cost per book is $22. This leads us to the following equation:

$75 (Price per Unit) – $22 (Variable Cost per Unit) =
$53 (Unit Contribution Margin)

Given these numbers, it all leads to the final equation:

$100,000 (Total Investment Required) / $53 (Unit Contribution Margin) =
1,887 books

What all of this means is that your company is going to have to print and sell 1,887 books at a price of $75 / book in order to just break even (pay all of its expenses). This means that the company is going to have to make a determination as to if it is even going to be possible to sell 1,887 of its books.

What All Of This Means For You

As IT managers it can be very easy for us to spend our days with our heads down focused on technical challenges. However, we need to realize that the decisions that the company’s management is making will impact us and our IT dream team.

One key decision that will need to be made is if the company should create and sell a given product. In order to answer this question, three important values need to be known: the price of the product, its variable costs, and its fixed costs. Once you know these values, you can calculate the breakeven volume that needs to be sold.

Once you know this value, the hard work really begins. Just exactly how is the company going to sell that many units? If the company can come up with good answers to this question, then you’ll know that the product will be a success.

– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World IT Management Skills™

Question For You: What role do you think that you IT team plays in setting the price for the company’s product?

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What We’ll Be Talking About Next Time

In order for you to have a happy, successful, and long career as an IT manager, you are going to have to understand how your company makes money. Since your company is in the business of selling some sort of product or service, it sure seems like we should take a look at just exactly how selling that product is going to help your company keep their doors open and you employed…

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