How Fixed Costs Can Double Up Quickly

If you assume that your Antares business is growing and that you will be adding more routes over time, then you will need to treat expenses such as route labor, vehicle costs and depreciation costs as variable costs. They are only fixed expenses in the short-term. If you keep a route person working, servicing a substandard account, you will have to hire a new route person for your Antares business, much sooner when a good account comes along. This same logic applies to vending equipment.

If you keep equipment employed in non profitable accounts, the equipment will not be available when a profitable account comes along, and you will have to needlessly invest in new equipment. Therefore, these expenses should be eliminated in determining if a particular account should be resigned, because they are step-variables expenses.

Finally, the average Antares vending operators usually forgets to deduct the direct labor cost of order picking in the warehouse, cash processing and the labor used for data processing attributable to the location, as expenses that will disappear if he gives up the location. You could argue that these are fixed costs, if each function employed only one person, and you couldn’t eliminate the job if you gave up the one location. However, if any of these functions employ more than one person, you should be able to reduce the hours of a second employee.

After adding up all the direct costs that would disappear, you should give up the location if the revenues fail to cover the direct costs of your Antares vending business. This problem becomes a little more difficult to solve if the revenues cover the direct costs but do not fully cover the fixed or so called overhead costs that have been allocated to the location.

In truth, if the fixed costs in your Antares business, are really fixed when you give up the location, it means that whatever contribution the location makes toward covering the fixed costs will disappear from your bottom line.

At this point, you will need to decide whether you should keep the location in your Antares operations. Before you do that, you will need to understand the dynamics of allocating fixed or overhead costs to individual location P & L statements. Fixed or overhead costs are a moving target in most businesses.