Contribution of each Workunit

In this example, we show how to diagnose the contribution (or profitability) of each Workunit. We look at two Workunits in one rented building that together make up Section A, and a head office located separately. You can use the same principles for any number of Workunits and any complexity.

	Revenue from sales	Wages	Other expenses	Net profit or $ contribution	Profitability	Assets	ROI
Workunit 1	$490k	$230k	$0k	$260k	53%	$0	na
Workunit 2	$470k	$400k	$0k	$70k	15%	$0	na
Section A'overhead'	$0k	$0k	$200k	-$200k	na	$500	na
Section A total	$960k	$630k	$200k	$130k	13%	$500	26%
Head office	$0k	$70	$40k	-$110k	na	$600k	na
Total for company	$960k	$700k	$240k	$20k	2%	$1.1m	1.8%

Notes on the method:

This is a service company, and it does not have raw materials or operating expenses (other than wages) for each Workunit. The Workunits have no assets.
For the Workunits, count revenue from sales.
Do not make allocations of expenses. That is, do not apportion head office expenses or the section's management expenses. The Section's 'overhead' expenses due to the building etc are all gathered together in one line. In this case, the section has $500k in assets. Not allocating overheads is the significant between this method and cost accounting. Allocating overheads gives incorrect results.
Similarly, do not make allocations for head office expenses.
If head office (or section A office) earns revenue in its own right, or if the Workunits have assets or other expenses, they can be entered in the appropriate places.

Comment on the result:

This is a very modest little company in trouble. At 2%, it is barely profitable and 1.8% ROI is terrible.
Workunit 1 is doing well and making a very good contribution at 53%. It is not a bad rule of thumb to aim for 50%.
Workunit 2 is not pulling its weight - it does not contribute enough.
Working backwards. If Workunit 2 was to increase its profitability to 50%, without reducing wages, this means the Workunit 2 revenue must increase to $800k. That is, by $330k. Which might be a big ask, although for most businesses it would not be out of the question. The extra $330k goes straight to the bottom line which becomes 32% ROI. (The reality is that such a change is extremely difficult to achieve. It will not happen by wishing it were so. It will need effort to implement a well thought out plan.)

	Revenue from sales	Wages	Other expenses	Net profit or $ contribution	Profitability	Assets	ROI
Total for company	$1.29m	$700k	$240k	$350k	27%	$1.1m	32%

If you decide that you would be content with a 20% ROI, by how much does Workunit 2 have to increase its revenue? In that case, the company net throughput needs to be only $220k. That is, an increase of $200k, which is a much more achievable target for Workunit 2.
Alternatively, you may decide that Workunit 1 can do better than 53%, and that 13% from workunit 2 is as good as they will get. (It generates $70k to the firm and keeps people employed.) Some business give better returns than others.

To use this tool, go to our work unit contribution diagnosis.