When a company gets into serious financial trouble, it's important to figure out as quickly as possible where the problem lies, especially if it might be that products are priced below cost. In such situations, however, it often takes weeks to determine the true cost of making a product, taking into account such factors as overhead and labor-utilization rates. Meanwhile, you could be focusing on the wrong solution. "If you're pushing sales at a time when you're losing money on each item," notes Gregory R. Kelly, president of Multi Financial Services Inc., turnaround specialists based in Birmingham, Mich., "the main effect will be to drive the company out of business."
To avoid such mistakes, Multi Financial has developed a technique for doing a quick analysis of a company's costs per unit. The technique, called reverse pricing, involves working backward from the product's price and taking out the costs that are relatively easy to determine -- raw materials, for example, and parts purchased from subcontractors. What's left over should be enough to cover the more elusive costs, plus a reasonable profit. Often, says Kelly, it isn't even close.