| Cost covering method - examples |  |
| Fixed Price Coverage Percentage Ceiling Ceiling on Coverage Percentage Exclusion Own Risk Fixed Price Used if: Stable business. No high risks. Predictable risks. Less useful for: Unpredictable service demand. No experience (knowledge, other country, equipment). Example Assume: Calculated service contract sales value: 10,000, advance payment Calculated service contract costs value: 8000 Actual sales spent on service order: 12,000 Actual costs spent on service order: 9600 This means: Installment invoice of 10,000 in advance No separate invoices will be sent Loss of sales: 2000 (10,000 -/- 12,000) Loss of costs: 1600 (9600 -/- 8000) P/L account: Sales - Costs: 400 (10,000 -/- 9600) profit Coverage Percentage Example Assume: Calculated service contract sales value: 10,000 Calculated service contract costs value: 8000 Actual sales spent on service order: 8000 Actual costs spent on service order: 6400 Discount: 10% This means: Installment invoice of 1000 (10,000 * 10%) Additional invoices of 7200 (8000 -/- 10%) Profit of sales: 200 (1000 -/- 800) Profit of costs: 160 (800 -/-640) P/L account: 1800 (1000 + 7200 -/- 6400) profit Ceiling Used if/for: Defining the most basic amount to deliver service (keep resources available), which means the customer has to pay for each following service that will be delivered. In a high risk or unpredictable environment. Customer cannot pay the entire service contract, but this could change over time (season revenues). As opposed to Coverage Percentage: No shared risk. Risk of service company is limited to ceiling. Example 1 Assume: Calculated service contract sales value: 10,000 Calculated service contract costs value: 8000 Actual sales spent on service order: 8000 Actual costs spent on service order: 6400 Ceiling: 5000 This means: Installment invoice of 5000 (= ceiling) Additional invoices of 3000 (8000 -/- 5000) Profit of sales: 0 (ceiling is consumed by customer) Profit of costs: Costs estimation should be related to sales, otherwise only assumptions can be made P/L account: 1600 (8000 -/- 6400) profit Example 2 Assume: Calculated service contract sales value: 10,000 Calculated service contract costs value: 8000 Actual sales spent on service order: 2000 Actual costs spent on service order: 1600 Ceiling: 5000 This means: Installment invoice of 5000 (= ceiling) No additional invoices, because ceiling is not reached Profit of Sales: 3000 (5000 - 2000) Profit of Costs: 2400 (4000 - 1600) P/L account: 3400 (5000 -/- 1600) profit Ceiling on Coverage Percentage Used if/for: Defining the most basic amount to deliver service (keep resources available), which means that the customer must pay for each next service that will be delivered. In a high risk or unpredictable environment. Customer cannot pay the entire service contract, but this could change over time (season revenues). As opposed to Ceiling: More risk for the customer. Example 1 Assume: Calculated service contract sales value: 10,000 Calculated service contract costs value: 8000 Actual sales spent on service order: 8000 Actual costs spent on service order: 6400 Ceiling: 1000, discount: 10% This means: Installment invoice of 1000 (= ceiling) Additional invoices of 7200 (8000 -/- 10%, discount < 1000) Profit of sales: 0 (ceiling is consumed by customer) Profit of costs: Costs estimation should be related to sales, otherwise only assumptions can be made P/L account: 1800 (1000 + 7200 -/- 6400) profit Example 2 Assume: Calculated service contract sales value: 10,000 Calculated service contract costs value: 8000 Actual sales spent on service order: 8000 Actual costs spent on service order: 6400 Ceiling: 1000, discount: 20% This means: Installment invoice of 1000 (= ceiling) Additional invoices of 7000 (8000 -/- 20%, discount > 1000 -> 600 added to be invoiced -> (8000 -/- 20% + 600)) Profit of Sales: 0 (ceiling is consumed) Profit of Costs: Hard to define P/L account: 1600 (8000 -/- 6400) profit Example 3 Assume: Calculated service contract sales value: 10,000 Calculated service contract costs value: 8000 Actual sales spent on service order: 800 Actual costs spent on service order: 640 Ceiling: 1000, discount: 20% This means: Installment invoice of 1000 (= Ceiling) No additional invoices, because the ceiling is not reached Profit of sales: 200 (1000 -/- 800) Profit of costs: 160 (800 -/- 640) P/L account: 360 (1000 -/- 640) profit |