Meet Lee, Leah and Lisa
Lee already has a machine that makes whatzits. His machine isn’t new, but it still runs okay.
Two of Lee’s workers can fabricate and finish a case of whatzits in eight hours using it. Lee pays each worker $15/hour (including taxes and benefits), spending $4,800 in monthly payroll for 20 cases of finished product. Lee’s labor costs per case is $240. By selling each case of whatzits for $1,000, Lee’s gross monthly profit is $13,200 after his raw material costs. (See table below.)
Leah just leased a new whatzit-making machine for a monthly lease fee of $732 per month.
Using this semi-automated machine, Leah has one worker producing a case of whatzits in only four hours. Leah has the same labor cost/hour as Lee, but produces twice the volume in half as many man-hours as Lee, so Leah’s labor cost per case is $60. Including the lease fee on the new equipment, Leah’s total production cost is $1,932 per month; less than $97 per case. Leah sells the 20 cases for $1,000 each and realizes more than $16,000 as a result of leasing upgraded equipment.
Lisa cut her prices 5% below what Lee and Leah charge, leading to greater customer demand.
To increase her production capacity, she leased a whatzit-making machine, identical to Leah’s, and runs it for two shifts every day. Her hourly cost of labor is the same as Lee’s and Leah’s, but she has two employees working full time to produce 80 cases of whatzits each month. In addition to labor costs, Lisa also pays an equipment lease fee of $732. Lisa sells each case for $950, but realizes a gross profit of $62,468 per month.
Upgrading your production capacity pays great dividends! New production efficiency pays the lease fees and new profits for the business owner!
How much additional profits could you make if you used a lease to acquire new equipment for your operations?
Make your own calculations! Click here to access our Lease vs. Buy calculator.
Since none of these entrepreneurs bought any equipment, they didn’t need to invest a significant amount of capital to accomplish these results. (Lee doesn’t have a monthly lease fee, but he might want to plan for higher maintenance costs and downtime.)