Estimated reading time: 7 minutes

Maggie Benson's Journey: Calculating Operating Costs

Editor’s note: Indium Corporation’s Ron Lasky continues this series of columns about Maggie Benson, a fictional character, to demonstrate continuous improvement and education in SMT assembly. In this episode, Sue and Andy have just returned to the Upper Valley of Vermont and are out for a walk.

“It was really a great idea to take a break and walk through Woodstock,” Sue said; Andy replied, “I really like the 1800s New England vibe.”

After 45 minutes of walking through this delightful village, they both felt the need for a treat, so Sue said, “Let’s go to the Mountain Creamery and get some ice cream.”

After a short drive to this legendary restaurant, they were served their ice cream by Tina, who started up a conversation with her customers by asking, “What brings you two handsome youngsters to visit us?”

Sue and Andy then regaled Tina with their stories of visiting Castellanos Electronics in Mexico and their need to take an afternoon date to Woodstock for a break.

After they finished their frozen treat, Sue took out her phone and checked her email. Both were surprised that this modest restaurant had good Wi-Fi.

“Hey, we agreed—no looking at phones on a date,” Andy teased.

Sue jokingly stuck her tongue out and they both laughed.

“Whoa, we got an email from Professor Coleman,” Sue said, feeling a little nervous.

“Yikes,” said Andy as he searched for the email on his phone as well.

Professor Patty Coleman is widely known as a pleasant and supportive mentor, but when you have just transferred to Ivy University from a two-year community college, you might be intimidated to receive an email from one of Ivy U’s most famous profs.

“Well, she says she has an exciting assignment for us if we’re interested,” Sue said. “Whew,” Andy said. “So, what’s the next step?”

“She wants to see us,” Sue answered.

A few days later, Sue and Andy were on the hallowed campus of Ivy University, walking up the steps of Newton Hall, named after the famous scientist.

Still a little nervous, they knocked on the door of Professor Coleman, who opened her office door, and welcomed them in. “Come in, you two. I’ve heard great things about your work in Mexico,” she said.

After a few moments chatting about their work at Castellanos Electronics, Patty quickly brought up the reason she had asked the pair to stop by.

“One of my friends from my undergraduate days at Tech has just purchased an electronics assembly company, similar to Benson Electronics. His business is a little slow and he found a long-term project wiring some separate modules together. It is a little bit like wiring a stereo system together, but more complicated. The workers also must wire and assemble the components in a larger housing. Because it is so dissimilar to assembling electronic circuit boards, my friend wants to charge for each hour that is spent on the work,” Patty explained.

“That seems reasonable,” Sue commented, as both nodded in unison. “So, how do we fit in?”

“My friend doesn’t know how much he should charge per hour,” Patty responded. “You are going to tell him.”

“We don’t know anything about this topic,” Andy said.

“That’s terrific,” Patty said, chuckling. “So, you have a lot to learn then. And don’t worry; I’m going to coach you. To help you develop the right skills for this assignment, I would like you to visit an auto repair shop.”

“What does auto repair have to do with wiring electronic modules together?” Andy asked.

“Nothing,” Patty said, chuckling again.

The wheels in Sue’s head were turning as she began to make the connection. “I think I’m getting it,” she said. “It’s a successful business that charges for the time that the auto technicians work. The charges per hour should be developed in a similar manner for wiring modules.”

“Precisely,” Patty answered.

Andy and Sue were young enough that they didn’t have much experience in getting their cars repaired, so they didn’t know much about repair costs.

“What do you think an auto repair technician is paid per hour?” Patty asked.

“We are paid about $22 an hour at Ivy Benson,” Andy replied, then queried, “An auto tech is likely higher skilled than us, so maybe $30 an hour?”

Sue pulled out her phone and did a quick internet search. “That’s just about right,” she exclaimed.

“So, how much do auto repair shops charge?” Patty asked again, and Andy suggested it might be about $45 an hour.

“Well, we’ll see if you’re right,” Patty said about their intended visit to the repair shop. “Sam Grabowski is expecting your visit. He is very open and will help you to understand why he charges what he does.”

Two days later, Andy and Sue were at Sam’s Auto Repair and were greeted by a very large, cheerful man with a red beard.

“Sam’s the name, but everyone calls me Bubba,” he said with infectious enthusiasm. “Professor Patty wants me to help you youngsters understand how a small business develops its labor rate.”

“We are curious,” Andy said, “how you came to know Professor Coleman.”

“My daughter Monica was a student of hers,” Bubba said. “Professor Patty suggested that Monica’s class do a group project to help understand how a small business is run. Monica offered my shop as a case study.”

“I love that idea,” Sue replied.

“I never thought I could teach anyone at Ivy U about anything, but I think they learned a lot by studying my shop,” Sam/Bubba said. “The students even offered some suggestions to improve productivity. I implemented them and it has helped quite a bit. As a result of that project, I got to know Professor Patty quite well.”

“Our main task is to determine how you developed your hourly rate for your auto repair techs,” Andy shared.

“Okay, so I need to explain a little about the business and I will not give you the answer. You need to tease it out from our discussions,” Bubba replied.

“Sounds like a plan,” Sue said.

He began to explain, “I have 20 auto techs and I pay them $30 an hour. We not only repair, but also can replace tires and batteries. We have a small quantity of common tires, batteries, parts, and supplies. I can get most things I don’t stock in a couple of hours.”

“With benefits, they must cost more like $35 an hour?” Sue said, and Bubba quickly replied, “More like $48 an hour. Medical insurance, Social Security, Medicare—it adds up and they get two weeks’ vacation.”

“So, you charge about $55 an hour?” Andy asked.

“Don’t forget rent for the building, equipment, and supplies for the restrooms, etc.,” Bubba said. “Like I said, it adds up quickly.”

Sue had been quiet as she contemplated the costs and how much Bubba had to charge. “So, your cost is maybe in the low $50s?” Sue asked.

“How about paying me? I’d like to earn at least $100,000 per year,” Sam said.

“So that adds at least $2.50 per hour,” Sue suggested.

Bubba was impressed as he could tell that Sue quickly divided $100,000 by the 20 auto techs and then by 2,000 hours in a work year.

“So now we are at mid-$50s to even low $60s an hour,” Andy said with a noticeable sigh.

Bubba continued to add in more costs: “Who answers the phone, balances the books, makes out the payroll, and orders parts? I have four workers who would be called ‘indirects’ in a factory that do these tasks,” Sam summarized.

“Now it seems like you need to charge somewhere in the mid-$60s,” Andy said, and Bubba confirmed that it was actually about $67 per hour.

“So, even though you pay your auto techs $30 an hour, each hour they work costs you $67?” Andy said, continuing the conversation.

“Yep, I charge $78 an hour,” Bubba concluded. “The profit goes to emergency and savings funds. I hope one day to buy this building with some of the savings. By the way, without this fund, making it through COVID lockdowns would have been tough.” Professor Patty says that doubling what the workers are paid comes close to their total cost. Two times $30 an hour equals $60 an hour. So, that is a little low.”

Sue and Andy thanked Sam and headed back to Ivy-Benson.

Now, how does all this relate to the cost of wiring stereo-sized electronic components and housing them? Stay tuned to find out.

This column originally appeared in the April 2023 issue of SMT007 Magazine.