Archived posting to the Leica Users Group, 2006/12/15
[Author Prev] [Author Next] [Thread Prev] [Thread Next] [Author Index] [Topic Index] [Home] [Search]I think I understand. That's what really scary about it! Ric On Dec 15, 2006, at 10:39 AM, R. Clayton McKee wrote: > 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 > > > _______________________________________________ > Leica Users Group. > See http://leica-users.org/mailman/listinfo/lug for more information