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19.6 Luxembourg Cost Structure Examples

Example 1: Retail Store​

Luxembourg Retail Store - Cost Structure:

Fixed Costs (Monthly):

  • Rent (prime location): €4,000
  • Salaries: €5,000
  • Social charges (24%): €1,200
  • Insurance: €300
  • Accounting services: €400
  • Utilities: €200
  • Marketing (fixed): €500
  • Total: €11,600

Variable Costs (Per €100 of Sales):

  • Cost of goods sold: €60
  • Sales commissions (2%): €2
  • Credit card fees (1.5%): €1.50
  • Packaging: €0.50
  • Total: €64 per €100 of sales

Selling Price:

  • Average markup: 67% on cost
  • If cost is €60, selling price is €100 (excluding VAT)
  • VAT rate: 17% (most retail goods)
  • Price including VAT: €117

Break-Even Analysis:

  • Contribution margin per €100 sales: €100 - €64 = €36
  • Contribution margin ratio: €36 ÷ €100 = 36%
  • Break-even (revenue): €11,600 ÷ 0.36 = €32,222 per month
  • Break-even (units): Depends on average sale amount

Example 2: Service Business (Consulting)​

Luxembourg Consulting Firm - Cost Structure:

Fixed Costs (Monthly):

  • Office rent: €2,500
  • Salaries (consultants, fixed): €8,000
  • Social charges (24%): €1,920
  • Insurance: €400
  • Professional fees: €600
  • Marketing: €800
  • Total: €14,220

Variable Costs (Per Hour):

  • Materials/supplies: €10
  • Travel (variable): €15
  • Other variable: €5
  • Total: €30 per hour

Billing Rate:

  • Rate excluding VAT: €120 per hour
  • VAT rate: 17%
  • Rate including VAT: €140.40 per hour

Break-Even Analysis:

  • Contribution margin per hour: €120 - €30 = €90
  • Break-even (hours): €14,220 ÷ €90 = 158 hours per month
  • Break-even (revenue): 158 × €120 = €18,960 per month

Example 3: Manufacturing SME​

Luxembourg Small Manufacturer - Cost Structure:

Fixed Costs (Monthly):

  • Factory rent: €5,000
  • Salaries: €12,000
  • Social charges (24%): €2,880
  • Depreciation: €1,500
  • Insurance: €600
  • Utilities (base): €400
  • Total: €22,380

Variable Costs (Per Unit):

  • Direct materials: €15
  • Direct labor (variable): €8
  • Variable overhead: €4
  • Total: €27 per unit

Selling Price:

  • Price excluding VAT: €50 per unit
  • VAT rate: 17%
  • Price including VAT: €58.50 per unit

Break-Even Analysis:

  • Contribution margin per unit: €50 - €27 = €23
  • Break-even (units): €22,380 ÷ €23 = 973 units per month
  • Break-even (revenue): 973 × €50 = €48,650 per month

Cost Structure Variations​

High Fixed Cost Business:

  • Example: Hotel, restaurant with high rent
  • High break-even point
  • High operating leverage
  • Profits sensitive to volume changes

High Variable Cost Business:

  • Example: Retail with high cost of goods
  • Lower break-even point
  • Lower operating leverage
  • More stable profits

Service Business:

  • Often high labor costs (variable or fixed)
  • Lower material costs
  • Break-even depends on utilization rates

Strategies to Improve Cost Structure​

Reduce Fixed Costs:

  • Negotiate lower rent
  • Reduce fixed staff (use variable labor)
  • Share facilities
  • Outsource non-core functions

Reduce Variable Costs:

  • Negotiate better supplier prices
  • Improve efficiency
  • Reduce waste
  • Optimize processes

Increase Contribution Margin:

  • Increase prices (if market allows)
  • Reduce variable costs
  • Focus on high-margin products/services
  • Improve sales mix

Luxembourg Compliance Note​

Luxembourg SMEs should:

  • Understand their cost structure
  • Regularly review and update cost analysis
  • Consider Luxembourg-specific costs
  • Include all compliance costs
  • Account for VAT properly
  • Consider social charges in labor costs
  • Use cost information for pricing decisions

Think It Through​

How does cost structure affect a business's break-even point and profitability? What strategies can a Luxembourg SME use to improve its cost structure?