Optometry Product Productivity

An Optometry practice provides different products and services. Based on product productivity one would consider performing the profitable products and services and eliminating none profitable ones. The decision to eliminate a product is not that easy because an underperforming product has to be judged on the performance of at least five years and not one year. Besides, sometimes the decision of eliminating an underperforming product or service may not improve the performance of the business and that is because part of the cost of performing the product still exists after eliminating it: That is indirect fixed costs.

When I ask Optometrists why they outsource lens edging and they reply: because it’s a labor-intensive activity. I immediately conclude that their costing method is based on labor hours pushing their practice to become more efficient by performing easy tasks and outsourcing labor-intensive activities to reduce their overheads. Labor and staff are direct fixed costs, by eliminating them we fail to eliminate indirect fixed costs like administrative costs, marketing costs, practice insurance, and security costs, etc.

To be able to calculate the full cost of a product or service, two types of costs need to be understood. The variable costs and the fixed costs. Variable costs are proportional to the volume provided such as using lab consumables with edged lenses. Fixed costs that don’t change with volumes especially in the short term since volume changes are insignificant. Indirect fixed costs is an element, added to those two types of costs, which adds more complexity in calculating them.

If lens edging would be considered a service provided, one way to allocate costs would be the number of hours of staff time spent edging lenses. However, this method of allocating costs does not take into consideration that the same time is spent edging two different lenses that have different prices. It would not be the right way to allocate the same fixed price to both lenses that have different prices.

The calculation of the cost of the product helps determine whether the market of laboring in lens edging labs is profitable and worth competing in. The basis of allocating cost can be a tricky operation since it has to take into consideration variable costs and direct and indirect fixed costs.