[Leica] In Shock

[leica at rcmckee.com (R. Clayton McKee)]

On 15 Dec 2006 at 8:33, Daniel Ridings wrote:

> I need clarification on that. I am probably not understanding something, 
> but the way I read it.
> 
> 1) Each deal looses a little
> 2) Volume means eventually losing a lot (Volume x "a little" = a lot)
> 
> What am I missing?

It's an old joke... but the REAL joke is that when you really 
understand how accounting works, it's entirely possible.

To borrow from public figures, it all depends on what the meaning of 
IS is.... or, in this case, what definitions of "cost" and "losing 
money" we're using, and it involves accountants, lawyers, and 
marketing consultants.  It's convoluted and not really fun.

VERY simplified example.  (Skip this if there's paint drying within a 
few miles -- go make interesting photos...)

Basic:  cost comes in two forms, for our purposes:  indirect and 
direct.  Direct costs are the costs involved in getting the product 
on the shelf.  Indirect costs are the costs involved in having the 
shelf there in the first place and getting customers into the store 
to buy things off it.

Hypothetically, I own a shop that sells, oh, let's say M8's.  
(obligatory on-topic reference. I don't, don't bother ordering.)

I buy M8's direct from Solms, delivered to my back dock, for $500 
each, (again, hypothetically and in our collective dreams), and 
that's the "direct cost" of the camera.

But "indirect" costs have to be paid too, and I still have to cover 
those from camera sales, so what I do is allocate those costs to each 
unit of product when I calculate the price.  Indirect costs here are 
$500 a month for the entire store, (cheap storefront, bad 
neighborhood, insurance by Smith and Wesson) and I think I can 
probably move, oh, five bodies a month, so that's another $100 per 
camera that I have to get if I want to stay in business over the long 
haul... so my "cost" on the camera is going to be about $600 each.

SALE:  M8's, $550 each, while stock of 20 lasts.

Losing my ass, or at least $50 each, right?

Not exactly. 

If I sell the cameras for LESS than $600 each, then by strict 
accounting standards I'm actually losing money on each sale, because 
I'm not covering the FULL cost of getting the camera to the customer, 
including the indirect costs of owning the store.  

The hook here is that the cost I have to meet ISN'T actually $600, 
it's "$500 direct plus part of indirect cost"  - anything over the 
direct cost is a contribution toward the total indirect cost.  

So each M8 that goes out at $550 makes a $50 contribution, and if I 
sell all 20, that's a thousand bucks - and I'm in high cotton 
watching out for GB's sheep.

I've "lost money" on each sale, based on theoretical (but legal and 
very necessary) accounting standards and practices -- but I've made 
it up on volume, based on real world numbers.

Can't speak for you guys but I need coffee now.



--


R. Clayton McKee                           http://www.rcmckee.com
Photojournalist                               rcmckee@rcmckee.com
P O Box 571900                           voice/fax   713/783-3502
Houston, TX 77257-1900                   cell phone #  on request