What actually determines whether a confirmed order is profitable

This page explains why a confirmed order price does not by itself guarantee a factory's planned profit

This page is for a merchandiser, a costing clerk, or a factory owner who has to explain why an order confirmed at a profitable price can still finish with less profit than planned, or with none at all. At work, a factory often treats the price agreed with the buyer as the end of the profitability question. It is only the start. This lesson mainly teaches the money flow: it separates the profit a confirmed price plans for from the profit an order actually earns once every real cost of making it is counted.

Delta Garments confirms Order A with Northline Apparel at FOB USD 3.20 per piece, planning a profit of USD 0.26 per piece, USD 3,900 across 15,000 pieces. That plan is built from five cost components: fabric, trims, making, overhead and profit. Every one of those components can move once production starts. Without this skill, a factory treats a confirmed price as a guaranteed profit and never checks whether the order's actual costs stayed inside the plan that price was built on.

What you need, and what this lesson does not cover

You need: the five cost components of a garment's price from lesson T01-C07-L01 (fabric, trims, making, overhead, profit). You do not need any accounting qualification.

By the end of this lesson you can:

• name the five cost components that a confirmed order price is built from;
• explain why a confirmed price plans for a profit rather than guaranteeing one;
• identify the real-life events that push an order's actual cost above its planned cost;
• calculate how much of a planned profit an extra cost such as overtime removes;
• avoid assuming a confirmed price alone proves an order will be profitable.

Not covered here: building the order's own full profit and loss statement (lesson T16-C04-L02), spreading overhead across several orders at once (lesson T16-C04-L03), and reading a factory's whole monthly result (lesson T16-C04-L04).

Words you will meet in this lesson

A confirmed price plans for a profit; the order's actual costs decide whether that profit survives

A confirmed order price is built from five cost components added together: fabric, trims, making, overhead, and profit. The profit component is planned at the moment the price is agreed, based on what fabric, trims, making and overhead are expected to cost. It is not yet earned. An order is only proven profitable once it ships, when every actual cost of the four other components can be compared against what was planned for them. If any actual cost runs above its planned figure, the difference comes straight out of the planned profit, because the buyer's price does not move once it is confirmed. This is why a merchandiser who only checks the confirmed price at the start of an order, and never again until shipment, cannot actually say whether that order made money; the price only ever describes the plan, and the plan is not the same fact as the result.

The gap between a planned price and an order's actual result shows up differently depending on the order

A merchandiser meets several different shapes of this same gap across a normal season, and learning to recognise each one prevents a confirmed price from being mistaken for a proven profit.

Delta Garments falls behind schedule on Order A and must add overtime to finish sewing on time

Order A is confirmed at FOB USD 3.20, planning USD 0.26 profit per piece. Partway through the 16-week timeline, Karim, the production manager, reports that sewing is behind schedule. To protect the shipment date at the end of week 16, Delta Garments adds overtime shifts. Overtime is already a fixed, known cost for Order A: USD 0.15 per piece if used across the whole order. Karim now has to work out how much of the planned USD 0.26 profit that decision removes, before deciding whether overtime is still the right choice.

Overtime on the whole order removes most, but not all, of Order A's planned profit

Overtime does not erase Order A's profit. It removes 57.7% of it, leaving USD 1,650 instead of the planned USD 3,900. Karim's decision is still worth taking if the alternative, missing the ship date, costs more.

Five steps to check whether a confirmed order actually kept its planned profit

1. List the order's five planned cost components from the confirmed price.
2. Record the actual cost of each component as the order is made.
3. Compare each actual cost against its planned figure to find the variance.
4. Add every variance together and subtract it from the planned profit.
5. Confirm the order's real profit only once it has shipped and every actual cost is known.

A common mistake is treating a confirmed order price as a guaranteed profit

A common mistake is assuming that once a buyer confirms a price, the planned profit is already earned. The confirmed price only fixes what the buyer pays; it does not fix what the order actually costs to make. A merchandiser who stops checking cost components once an order is confirmed can discover, only at shipment, that overtime, a fabric price change, or a rework cost has quietly removed most of the planned profit. What this costs a factory that gets it wrong is real: a factory that keeps confirming orders without tracking their actual costs against the plan can run a season of orders that all looked profitable on paper and earn far less than its own costing sheets promised. The mistake is rarely a single large loss on one order; it is usually many small, unwatched cost overruns spread across many orders, each one small enough to go unnoticed until the whole season's result is added up and falls short of the plan.

• A confirmed price is built from five cost components: fabric, trims, making, overhead and profit.
• Planned profit is only proven once every actual cost of an order is known, usually at shipment.
• A fixed-price order gives no room to pass an extra actual cost on to the buyer.
• Overtime, a fabric price change, or rework are common causes of an actual cost running above plan.
• Make to Stock orders carry the extra risk of the forecast itself turning out wrong, before any cost is even counted.
• A season of confirmed orders can look profitable on paper and still earn less than planned if actual costs are never checked.

Karim decides whether to add overtime to Order A after sewing falls three days behind schedule

Order A is in week 11 of its 16-week timeline. Karim reports that sewing is three days behind schedule, which risks missing the port cut-off on day 13 of the shipping stage and the sailing date at the end of week 16. Two options are open: add overtime shifts across the whole order to recover the lost days, or accept the delay and air freight the finished goods instead of shipping by sea.

Here is the note Karim actually wrote:

Which option keeps more of Order A's planned profit, and by how much? Decide before opening the answer.

Order and business P&L sheet: record planned cost against actual cost before you call an order profitable

Open the course workbook's "Order P&L" sheet. It lists Order A's five cost components as separate rows, with a planned-cost column and an actual-cost column, and calculates the variance and the resulting actual profit with a live formula. Enter overtime, a fabric price change, or any other extra actual cost as an addition to the relevant component's actual-cost cell, and let the sheet recalculate the order's real profit automatically.

[Download the Order and business P&L sheet](../../templates/T16-C04-order-and-business-pl-sheet.xlsx)

Download the Order and business P&L sheet (Excel)

Lesson 4.2: Building a single order's own profit and loss statement

You now know that a confirmed price is only a planned profit until the order ships. The next lesson turns Order A's own cost components into a full profit and loss statement, line by line. Back to the course map