There's a company that makes shirts for men and women using one cloth-cutting machine and one sewing machine. The manufacturing sequence is the same. A single women's shirt is cut in 2 minutes, sewn in 15 minutes, requires fabric costing £45 and sells for £105. A single men's shirt is cut in 10 minutes, sewn in 10 minutes, requires fabric costing £50 and sells for £100. The market's weekly demand is 120 women's shirts and 120 men's shirts.

	Women's	Men's
Weekly demand	120	120
Price	105	100
Raw material cost	45	50
Cutting time	2	10
Sewing time	15	10
Total process time	17	20

Each machine has an operating capacity of 2400 minutes per week and the company's weekly operating expenses are £10,500.

Machine	Minutes necessary for women's shirt	Minutes necessary for men's shirt	Total minutes necessary	Necessary minutes / available minutes
Cutting	240	1200	1440	60%
Sewing	1800	1200	3000	125%

Clearly, there is not enough capacity at the sewing machine to satisfy the market demand for both types of shirt. The company does (maybe) the obvious thing and focuses on the most profitable product. It satisfies all the demand for the most profitable type of shirt first and then uses the remaining time at the sewing machine to make the other type of shirt. The women's shirt is more profitable. It sells for more, fabric costs are less and it is quicker to make. The company can make 120 women's shirts using 1800 minutes at the sewing machine. The remaining 600 minutes at the sewing machine allows us to make 60 men's shirts.

Revenue from women's shirts (£105 x 120)	£12,600
Revenue from men's shirts (£100 x 60)	£600
Total revenue	£18,600
Raw material cost for women's shirts (£45 x 120)	£5,400
Raw material cost for men's shirts (£50 x 60)	£3,000
Total raw material cost	£8,400
Gross margin	£10,200
Operating expense	-£10,500
Net profit	-£300

By focusing on the most profitable shirt the company ends up making a £300 net loss every week.

Say the company did something else. Let's say it decides to make 120 men's shirts and use the remaining time at the sewing machine to make women's shirts. 120 men's shirts use 1200 minutes at the sewing machine. The remaining 1200 minutes at the sewing machine allows us to make 80 women's shirts.

Revenue from men's shirts (£100 x 120)	£12,000
Revenue from women's shirts (£105 x 80)	£8,400
Total revenue	£20,400
Raw material cost for men's shirts (£50 x 120)	£6,000
Raw material cost for women's shirts (£45 x 80)	£3,600
Total raw material cost	£9,600
Gross margin	£10,800
Operating expense	-£10,500
Net profit	£300

By increasing the production of the least profitable product while decreasing the production of the most profitable product the company ends up making a £300 net profit every week. Conventional cost accounting wants to minimise the cost of making a product based on the assumption that the lower the cost of a product, the greater the company's profit. One element in the cost of making a product is the time the product uses company resources. Therefore one way to reduce the cost is to reduce the time at a machine.

For a £100 investment we can reduce the cutting time of a men's shirt from 10 to 8 minutes. That's a 10% reduction in the total process time for a men's shirt, down 2 minutes from 20 to 18 minutes. This is a good investment from a cost accounting perspective. Trouble is it won't increase the overall net profit. The company will still have the same bottleneck on the sewing machine so it can't produce any more shirts than it could originally. The weekly net loss is worse, -£302 (net loss plus -£2 which is approximately the investment of £100 spread over 52 weeks).

For a £1000 investment the company can decrease the sewing time of a women's shirt by 1 minute and increase its cutting time by 3 minutes. This increases the total process time for a women's shirt by 2 minutes. Cost accounting would probably reject this because it increases the product cost. However, by reducing the sewing time required by women's shirts the company has effectively created more capacity at the sewing machine, which allows it to make more women's shirts and satisfy more of the market's demand.

Revenue from men's shirts (£100 x 120)	£12,000
Revenue from women's shirts (£105 x 85)	£8,925
Total revenue	£20,925
Raw material cost for men's shirts (£50 x 120)	£6,000
Raw material cost for women's shirts (£45 x 85)	£3,825
Total raw material cost	£9,825
Gross margin	£11,100
Operating expense	-£10,500
Investment	-£20
Net profit	£580

By increasing the process time of a product, and therefore increasing its cost, the weekly profit has almost doubled.

A company's capacity to produce and sell product is a system or chain of interdependent activities. Trying to maximise profits by cutting costs and investment will eventually damage a company's capacity to make sales. The goal of every company is to make money, not to save costs. Capacity should be protected. A company should do everything possible to uncover excess capacity (by eliminating waste and re-evaluating how things are working) and find new ways to use its existing system and the costs built into it to generate more profit without significantly increasing investment. Then it should look to reduce investment (because that increases Return On Investment) but only by producing less inventory, i.e. product that has not been sold. Cutting costs is the easy option - it should be the last option a company considers.