Set one comparable decision contract
Record these assumptions before calculating
- Units started, good units, scrapped units and reworked units from one defined run. (not complete)
- Material issued and material recovered, on one valuation basis. (not complete)
- Setup time and run time separated from idle or unrelated time. (not complete)
- A declared price and indirect-tax basis for good units. (not complete)
- A named inventory horizon and any holding or obsolescence cost kept outside unit production cost unless deliberately included. (not complete)
batch contribution = (good units × price per good unit) - material used - productive labour - setup cost - other variable batch cost
- good units
- Accepted saleable units after scrap and rework (units per batch) — production record or labelled scenario
- setup cost
- Changeover, cleaning, calibration and start-up resources consumed once per batch (CU per batch) — time and cost record
- other variable batch cost
- Energy, consumables, inspection, packaging and outsourced steps included in scope (CU per batch) — invoice, meter, routing 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: Small-Batch Manufacturing Economics
Invented tax-exclusive batch: 120 units started, 108 good units sold at 32 CU each, 1,440 CU material, 720 CU labour, 300 CU setup and 180 CU other variable cost.
| Line | Calculation | Result |
|---|---|---|
| Good-unit revenue | 108 × 32 CU | 3,456 CU |
| Included production cost | 1,440 + 720 + 300 + 180 | (2,640 CU) |
| Batch contribution | 3,456 - 2,640 | 816 CU |
| Cost per good unit | 2,640 ÷ 108 | 24.44 CU |
| Case | Changed input | Decision result |
|---|---|---|
| Lower yield | 96 good units at the same batch cost and price | 432 CU contribution |
| Base | 108 good units | 816 CU contribution |
| Higher yield | 114 good units | 1,008 CU contribution |
Apply a batch release gate before committing capacity
| Gate | Base release scenario | Downside release scenario | First changed constraint |
|---|---|---|---|
| Demand unit | 108 saleable units in the stated horizon | 96 saleable units in the same horizon | Sell-through and stock exposure |
| Setup boundary | 300 CU once for the batch | 300 CU once for the smaller good-unit output | Setup recovery per good unit |
| Yield and rework | 108 good units from 120 started | 96 good units at the same included batch cost | Cost per good unit |
| Capacity | Recorded setup and run time fits the release window | Rework or slower run consumes the protected window | Alternative use of the constraint |
| Cash and stock | Cash and finished stock fit the declared horizon | More unsold stock or delayed recovery breaches the user boundary | Release, resize or stop |
Use the exact calculation owner
- Minimum Batch Size Planner
Find the minimum production batch that recovers setup cost and protects the entered contribution
Turn the calculation into an operating decision
- Freeze the product specification and acceptance rule.
- Reconcile started, good, scrapped and reworked units.
- Assign setup once to the batch and run costs on the recorded driver.
- Calculate contribution and cost per good unit.
- Stress yield, sell-through and run time separately.
- Compare the result with the smaller/larger batch and the best use of constrained capacity.
- Dividing batch cost by units started rather than good units.
- Hiding setup inside an arbitrary per-unit rate.
- Treating recoverable material and unusable scrap as identical.
- Assuming every completed unit sells in the decision period.
- Counting fixed overhead twice across the batch and price target.
Questions to settle before acting
- Should setup cost be spread across units?
- For a batch comparison, assign the setup once to the batch and divide by good units only after the batch total is reconciled.
- Does a positive batch contribution justify producing it?
- Not by itself. Compare inventory exposure, cash timing and contribution from the scarce resource the batch will consume.
- What should be measured after the run?
- Record actual setup time, run time, material issued, good output, scrap, rework and sell-through on the same batch identifier.
Sources and methodology
- Small-Batch Manufacturing Economics: calculation boundary — Margin101: Formula, unit, assumption and limitation reference for the primary decision handoff.
- Lean and process improvement — NIST Manufacturing Extension Partnership: Authoritative process-improvement context; it supplies no Margin101 benchmark or scenario input.