Path: utzoo!utgpu!jarvis.csri.toronto.edu!mailrus!tut.cis.ohio-state.edu!ucbvax!UCONNVM.BITNET!SEWALL From: SEWALL@UCONNVM.BITNET (Murph Sewall) Newsgroups: comp.sys.apple Subject: Re: Lasers cost cutting secret. Message-ID: <8903022355.aa13490@SMOKE.BRL.MIL> Date: 3 Mar 89 04:43:04 GMT References: Sender: daemon@ucbvax.BERKELEY.EDU Organization: The Internet Lines: 58 >In article <8902281447.aa18108@SMOKE.BRL.MIL> SEWALL@UCONNVM.BITNET (Murph >Sewall) writes: >> R&D costs are SUNK (gone, kaput, spent years ago!). Development is >ALREADY >> PAID FOR (whether or not in retrospect it was a good idea). Besides, the >> Apple 2 line already has profited Apple enough to make Midas jealous. > >Some part of the cost of a product comes from its cost of development. I >don't know how this is allocated over the life of the product, but >presumably it declines as time goes by, and eventually becomes 0 (or close >to 0). > >In addition, some part of the cost of a product goes towards future R&D. An accountant's justification (economists everywhere snicker -- actually academic accountants DO know better -- the citations date back at least to the early 60's). Development costs were GONE the instant the bills were paid. Investments (past, present, and future; advertising, promotion, or R&D) are made to generate income in the FUTURE (the ONLY place money can come from). Those sunk costs are embedded in prices ONLY to the extent they have BEEN earned! Countless inventors and marketers have discovered that it OFTEN isn't possible to recover investment in R&D or anything else (the justification for profit is as an INCENTIVE to encourage entrepeneurs to risk losing it all in the hope of a large reward IF successful). The reason that the point IS important, is that if we don't understand it, we deserve to be whipped by foreign competition that clearly does. A decade ago the tire industry petitioned Congress for protective tariffs on the grounds that they couldn't make enough profit selling bias-ply tires to "afford" the investment in plants to manufacture radials. Perhaps, a surprise (maybe just a convenient place to "hide"), Congress was wise enough NOT to support such a notion (whether Congress recognized that CURRENT profits from bias-ply tires were IRRELEVANT isn't self-evident). IF the tire companys didn't borrow the funds to build the plants they WOULD go bankrupt -- the justification for investment is FUTURE income. They DID borrow the capital, and they continue to survive (making radial tires after all :-). Prices are expression of what CUSTOMERS VALUE. At least SOME contribution to profit is made as long as the CASH FLOW is positive (revenues exceed OUT-OF-POCKET cost). All the "overhead" allocations are accountants' attempts to evaluate past decisions, but they are economically IRRELEVANT. Asian managers really seem to understand that MUCH BETTER than American managers seem to. A REAL irony is that the Japanese say they learned the idea from U.S. business schools!! Murph Sewall Vaporware? ---> [Gary Larson returns 1/1/90] Prof. of Marketing Sewall@UConnVM.BITNET Business School sewall%uconnvm.bitnet@mitvma.mit.edu [INTERNET] U of Connecticut {psuvax1 or mcvax }!UCONNVM.BITNET!SEWALL [UUCP] -+- I don't speak for my employer, though I frequently wish that I could (subject to change without notice; void where prohibited) According to the American Facsimile Association, more than half the calls from Japan to the U.S. are fax calls. FAX it to me at: 1-203-486-5246