Set one comparable decision contract
Record these assumptions before calculating
- The exact machine, labour step or other resource that is constrained. (not complete)
- Base good-unit output, sell-through and contribution for one period. (not complete)
- Incremental output and every cost needed to make it. (not complete)
- New price and a range of units sold at that price. (not complete)
- Quality, lead-time, working-capital and maintenance limits that can veto a scenario. (not complete)
scenario contribution = (units sold × unit contribution after the change) - incremental capacity cost - other changed cost
- units sold
- Units expected to sell inside the comparison horizon (good units) — business record or labelled scenario
- unit contribution
- Price less included variable cost per good unit (CU per unit) — price and production-cost record
- incremental capacity cost
- Extra shift, overtime, setup, maintenance or outsourced capacity caused by the scenario (CU per horizon) — quote, roster, maintenance plan or scenario
Keep one currency, indirect-tax basis, time horizon and cost boundary throughout. Scenario values below are invented currency units (CU), not benchmarks.
Worked example: Make More or Raise Price? Manufacturing Capacity
Invented monthly comparison: base 500 units at 12 CU contribution. In the make-more case, overtime and scrap reduce contribution to 10 CU across the entire 580-unit run, and the added shift costs another 240 CU. Raise-price retains 460 units at 14 CU contribution with 80 CU relabelling cost.
| Line | Calculation | Result |
|---|---|---|
| Base contribution | 500 × 12 | 6,000 CU |
| Make-more contribution | 580 × 10 - 240 | 5,560 CU |
| Raise-price contribution | 460 × 14 - 80 | 6,360 CU |
| Raise-price difference vs base | 6,360 - 6,000 | 360 CU |
| Case | Changed input | Decision result |
|---|---|---|
| Price downside | 420 units × 14 - 80 | 5,800 CU |
| Price base | 460 units × 14 - 80 | 6,360 CU |
| Price upside | 490 units × 14 - 80 | 6,780 CU |
Turn the calculation into an operating decision
- Identify and measure the constrained resource.
- Build the no-change contribution baseline.
- Cost the true incremental capacity needed for more output.
- State low, base and high retained-demand cases for the price change.
- Compare signed contribution and constrained-resource use.
- Run a small reversible test and reconcile actual price, volume and yield.
- Comparing sales revenue instead of contribution.
- Assuming overtime output has the base unit cost.
- Treating the price-volume response as known.
- Ignoring downtime, maintenance, quality or cash limits.
- Adding fixed cost that does not change or omitting step cost that does.
Questions to settle before acting
- What if both output and price can change?
- Model the combined case separately so the output cost and demand assumption remain visible rather than blending them into the base.
- Should contribution per hour decide automatically?
- No. It ranks economic use of the constraint; quality, delivery, customer and cash constraints can still veto the option.
- How should demand be represented?
- Use an explicit range supported by your tests or history, never a universal elasticity assumption.
Sources and methodology
- Make More or Raise Price? Manufacturing Capacity: calculation boundary — Margin101: Formula, unit, assumption and limitation reference for the primary decision handoff.
- Lean and process improvement — NIST Manufacturing Extension Partnership: Context for identifying process constraints; no demand or capacity default is adopted.