Cat lavatories Labor costs

Question

After the termination, the 5M EUR of labor costs, which will be reduced, could be added to the total gross profit (145.6 M EUR). Or is it counted in the total costs of Cat lavatories, which will be neutralized by the termination since it is no more generating costs or sales?

Answer 1

Hi there,

Might be a bit of an inaccuracy in the case language here, which leads to confusion.

technically, the $5m labor cost are linked directly to production here (reference below Table 3) and hence should be considered as COGS, as per general definition. This would mean Gross Profit impact of termination is neutral, provided cost reduction really correlates 1:1 with sales reduction.

However, description in the case and corresponding proposed solution (see conclusion) indicate that the case author deems this the labor cost general operating expenses, not COGS. In such case, termination would have positive profit impact as Gross Profit doesn't change (0 in Y3), but general op expenses are reduced by $5m.

Hope this explains.

Regards, Andi

Answer 2

Technically, labor costs are not considered when calculating “gross margin”. They go into operating margin or operating profit.

As such: yes, you should add the 5 million to the gross profit.

Answer 3

Hi there,

Basically, you'd still be having people working and paying their salaries even if you're not making sales.

Same here. So you should add the 5M to the gross profit.

Best,
Cristian

Answer 4

Hi there,

Remember that if you cut costs for that category, sales will also be reduced. (1 to 1 relationship).