Archived posting to the Leica Users Group, 2006/12/15

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Subject: [Leica] In Shock
From: ricc at mindspring.com (Ric Carter)
Date: Fri Dec 15 08:35:40 2006
References: <45821A0B.3030404@san.rr.com> <45826D3D.28105.68E84A@localhost>

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
>
>
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In reply to: Message from glehrer at san.rr.com (Jerry Lehrer) ([Leica] In Shock)
Message from leica at rcmckee.com (R. Clayton McKee) ([Leica] In Shock)