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UNIT COSTS INSTEAD OF BLOCK OF CAPITAL EXPENDITURE

Managing growth and costs efficiently: pay-per-part and pay-by-the-hour

An illustrative calculation from the automotive industry for pay-per-use models

Strong growth is a challenge, especially in the automotive industry. Liquidity is important, but the ratio of costs to revenue in the billing period (e.g. a quarter) is even more crucial. To maintain this ratio at a constant level, CHG-MERIDIAN offers pay-per-use models for capital assets such as die-cutting machines, CNC machining centers, injection molding machines, presses, and other production equipment. Under these models, customers pay for their equipment based on the number of units produced or hours of machine operation, i.e. pay-per-part or pay-by-the-hour.

 

In practice it looks like this:

  • The lease volume for the required length of time is calculated on the basis of the prices negotiated for the capital assets.
  • The lease volume is then divided by the number of units to be produced or the number of hours of operation in accordance with the volume to be produced over the term of the lease. This gives the price per part or price per hour.
  • From the inception of the lease, payment is based on the number of units or hours measured; measurement takes place once a quarter or once a year.
  • The financing partner bears the risk in respect of the amortisation process of the investments.

 

 

Example: car door production:

  • Investment volume: $10 million
  • Expected no. of units per year (illustrative):
    Year 1: 50,000 / Year 2: 100,000 / Year 3: 150,000 / Year 4: 150,000 / Year 5: 50,000 (minimum volume: 500,000 units)
  • Term: 60 months
  • Price per door (part): $19.18

 

 

If you are a manufacturer in the automotive, aviation or engineering industry and are looking to pay for your equipment on the basis of units produced or hours operated, please contact us.

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I am looking forward to talking about pay-per-use models with you.

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