Client :

Mike and Matt Smith Project Number 216441737

D-S Meats Inc Cost Analysis, Little Things Add Up
515 E Payson Canyon Rd October 17, 2022
Payson, UT 84651 Page 1 of 3

Small Things Add Up Quickly

(Specially as Overhead)
Benjamin Franklin famously said, “a penny saved is a penny earned.” In business,
where many processes are repeated hundreds or even thousands of times per year, pennies
can often become sizable quantities.
As a concrete example, let us take the case of 7 fly catching light fixtures 1. One can
look at the diminutive fluorescent bulbs and dismiss considering the costs associated with
these items.
The average cost of electricity in this county, according to www.chooseenergy.com is
$0.106/kW-hr. This means that a 1 kW (1,000 W) load running for 1 hour will set you back a
little more than a dime. Each bug-light only uses about 85W 2 (much less than 1,000) so why
should we care?
Let us suppose that each light stays on 24 hours per day, every day of the year. We
could calculate the energy usage at:

Fixtures
7

$ /kWhr

There are other costs involved with these fixtures. Each fixture has two special
germicidal fluorescent lamps that cost about $15 each, and that last about 8,000 hours each
(according to the manufacturer). If they stay lit 24/7, then 8,000 hours is just over 333 days.
This implies that 14 bulbs will have to be replaced each year, or (14 bulbs/year) x ($15/bulb) =
$210/year.
1
The thing that lights up, the “bulb” is the “lamp.” The thing that holds the lamps is called a “fixture,” or lamp holder.
Unfortunately, in common usage, lamp is used to mean both the bulb and the fixture.
2
In fact, 85W would be (85/1000) kilowatts * ($0.106) per kilowatt hour  0.9¢ per hour per fixture

D. Bernardo, 2022
Client :
Mike and Matt Smith Project Number 216441737
D-S Meats Inc Cost Analysis, Little Things Add Up
515 E Payson Canyon Rd October 17, 2022
Payson, UT 84651 Page 2 of 3

Adding that to the $552 in electricity  $762/year to operate the bug killers.
However, are those all the costs? How about the cost of labor to replace the bulbs? Or
to order, pay for and receive the bulbs? Let’s ignore the costs of labor for this exercise.
What if we are running the air conditioning, don’t bulbs make heat?
Well, it turns out that fluorescent lamps convert about 45% of all the energy they use
into heat. So, what happens when the air conditioning is running? Research shows that the
best air conditioning systems use 3 Watts of electricity to cool 1 Watt of heat energy; and a
standard system uses about 4 Watts. Using this information:
(40 Watts/lamp) x (45% conversion to heat) x (14 lamps) = 252 Watts of Heat Energy
(4 W of AC/W of heat) x (252 W heat) = 1008 Watts
of electricity used by the AC to cool the heat generated by the light bulbs. Which is just over 1
kilowatt, so this is “only” another $0.10 per hour.
In South Florida we use the AC system every day of the year, but for this example, let
us say the AC is only operating for 1/3 of the year.
(1008 W) x (24hr/day) x (365 day/year) x (1/3) x (0.001 kW/W) x ($0.106/kW hr) = $312
Which brings us to a grand total of $552 + $210 + $312 or $1,074/year to operate 7 fly
killing fixtures 24 hours per day. Thinking about Gross Margin and Revenue, we may ponder
another question. How much do we need to sell, to pay for the operation of these bug killers?
Since of every dollar that enters the cash register, only the gross margin is available to
pay things that are considered overhead, let us look at this question with various levels of
gross margin percentage. Given that
Gross Margin = Revenue * Gross Margin Percentage; we can deduce that
Revenue Required = Gross Margin Required / Gross Margin Percentage
WHICH gives us the eye-opening result that if we GM required:
operate with a 10% gross margin, we will have to sell $10,740 of
product just to earn enough to pay for the operation of the bug killers.
So, what is the easiest way to reduce all these numbers?
G M%
5%
10%

D. Bernardo, 2022
Client :
Mike and Matt Smith Project Number 216441737
D-S Meats Inc Cost Analysis, Little Things Add Up
515 E Payson Canyon Rd October 17, 2022
Payson, UT 84651 Page 3 of 3

In particular, how do we reduce the amount of sales revenue required?

What if we operate the fixtures for 9 hours/day for 5 days a week? That would be 45
hours per week, instead of 24x7 or 168 hours per week. Then instead of operating 100% of
the time, the units would operate 45/168 or 26.7% of the time. The yearly costs would now be
reduced by 73.2% (100 – 26.7 = 73.2)
The cost to operate the fixtures would be 26.7% x $1,074 or $287: a reduction of nearly
$800! Revenue required to pay for the operation would also be reduced by 73.2%.
This begs the following question. Is it worthwhile to invest in a system, perhaps some
simple timers, which would only allow the lights to burn for the appropriate 45 hours of the
week?
The difference between operating 45 hours a week and operating 24/7 is approximately
$800 per year. Any set of timers that cost less than $800 would pay for itself in under a
year.

In summary:

 Even seemingly inconsequential items can cost thousands of dollars

in a surprisingly short amount of time.

 Only gross margin is available to pay for costs not directly related to
the actual volume of production. Because of this, overhead requires a
surprisingly large amount
of revenue to cover. One
of the major reasons why
you will often hear that
one “must always reduce
overhead.”

D. Bernardo, 2022