11.5 The distribution of the direct costs of an internal workshop in proportion to physical quantities is objective.

1. Let's consider again the top of the nested table of analysis:

	Child 1	Child 2	Parent

• children are the enterprises in the parent enterprise.
• A parent always has at least two children and most often more.
• A legal-entity enterprise is the parent of children who are themselves parents, etc., so that in each case the complete set of nesting paintings consists of at least three copies and, depending on the width and depth of the assortment sold, up to tens of thousands.
• Parents and children are margin-producing sections and no other division that is part of a contract venture is such a section.

		Has	B	C
		Child 1	Child 2	Parent
3	Direct costs	300	240	{540

2. The nesting table also analyses the costs of margin-producing sections:

The total direct costs of the parent are:

• at least equal to the sum of the children' direct costs;
• often greater than this sum;
• always higher than this sum when the parent is the contractual undertaking (more on this subject in the argument of the following proposition).

3. A contract enterprise is likely to have one or more internal workshops.

A factory which, within a contract enterprise, supplies products for sale to sister or cousin margin-producing sections (with different degrees of kinship) constitutes what we call an internal workshop, comprising, if necessary, a chain or a tree structure of workshops in the workshop.

It is customary to say that several kinds of internal workshops are laboratories, as in bakery, this place where the production of margins is done at the counter or during deliveries and not in the bakery. A maintenance service included in the organisation of a contract enterprise is not an internal workshop in the sense we give to this name:

• it does not provide anything to be sold by the contractual undertaking;
• Its economic status is the same as that of the general accounting department, or the research and development department when the latter's mission is to initiate production and not to produce what it has initiated.

4. The direct costs of an in-house workshop result in the existence of unit costs.

• If the workshop produces only one product, the unit cost of this product is, over the period in question, equal to the sum of the direct costs of the workshop divided by the quantity produced.
• If the workshop develops several products, they have in common a unit of work which is often, but not exclusively, a production time. In this case, each of the unit costs is the result of the rule of three: (sum of direct costs / total number of units of work) x number of units of work of the product.

5. The unit costs of a supplier shop in a margin-producing section are part of the direct costs of this section.

These unit costs are not yet full cost prices, and they are often far from being so. Nevertheless, these partial unit costs:

• Ensure a full breakdown of direct internal shop costs.
• participate in a conceptually accurate estimation of direct margins;
• provide an objective basis for determining the truly complete cost prices, i.e. not only including all charges but also the profit of the legal-entity enterprise included.

6. The costs, whether they are of a workshop or a margin producing section or of a contract contract, are for some variable and for others fixed.

It should be remembered that we call profitability exclusively a ratio of the family of those that appear on the following extract of the nesting table, in lines 7 and 12:

		A	B	C
		Child 1	Child 2	Parent
2	Turnover	500	400	900
3	Direct costs	300	240	{540
4	Direct margin	200	160	{360
7	Direct profitability	40%	40%	{40%
	8	Common costs	340
	9	Direct margin (C4 – C8)	20
		If the parent enterprise is the legal-entity enterprise:
	12	its profitability (C9/C2)	2,2 %

The distinction between variable and fixed costs – fixed in a range of quantities sold – makes it possible to estimate a threshold at which the direct margin of a child becomes positive or the final margin of the legal-entity enterprise becomes profitable. These break-even estimates obviously have their reasons for being in business management.

Unit cost prices vary all the more according to the quantities produced or sold the higher the proportion of fixed costs. These variations justify the quantitative discounts introduced in the sales tariffs, although this is according to scales that are often very expensive to estimate precisely.