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Cost Accounting Videos 27 videos
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Cost Accounting: How Do Product Choice Decisions Work? 0 Views
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Description:
How do product choice decisions work? Consumers, when determining how to spend their disposable income, make product choice decisions. Studies have shown that they prefer a whole bunch of options all at once rather than one option at one time and one at a later time, this is because they become fearful that something better will come along and they’ll regret their original choice.
Transcript
- 00:00
And finance Allah shmoop How do product choice decisions work
- 00:08
I cast my brass off is the best purveyor of
- 00:11
fine coffee in the world at least according to them
- 00:15
So they essentially offered three sets of products retail coffee
- 00:18
roasting equipment and coffee beans Last year they did two
Full Transcript
- 00:22
million bucks of sales from their coffee bar outside the
- 00:24
store In warehouse they sold fourteen million dollars worth of
- 00:28
roasting equipment and nine million dollars worth of beans is
- 00:32
either is Kona Shmona Whatever But on a total of
- 00:35
twenty five million dollars in sales they lost a million
- 00:38
dollars and their credit lines are tapped and well they
- 00:42
have to start making money They just aren't sure how
- 00:44
to do it Luckily they're all watching this video The
- 00:47
backstory Most companies sell more than one product and each
- 00:50
product carries different profit margins or contribution margins of dough
- 00:54
back to the company Each product also carries more needs
- 00:57
for resource is like in order to sell the roasting
- 01:00
equipment the company has to employ super smart people who
- 01:03
really know their stuff and are selling to coffee aficionados
- 01:07
who really know their stuff So hiring those people is
- 01:10
well expensive versus the simple baristas who don't even need
- 01:14
a high school education outside you know serving coffee to
- 01:17
retail customers who barely need to be literate and will
- 01:20
someday you know have those Maurice does basically be replaced
- 01:23
by robots totally different resource needs for those two very
- 01:27
different products And the presumption here is that well maybe
- 01:30
resource is should be allocated away from the very expensive
- 01:34
to service and probably lower margin coffee roasting materials And
- 01:38
instead a serve more coffee outside with cheap labor you
- 01:42
know that eventually be replaced by robots That case maybe
- 01:45
maybe not all rights Let's turn the lens here On
- 01:48
another example if you have a stationary store like one
- 01:51
that sells high quality papers for weddings funerals bar mitzvahs
- 01:54
and pet birthdays you know that kind of stationery store
- 01:57
not one that just stands Still it wouldn't be crazy
- 01:59
to have that business self three million dollars worth of
- 02:02
paper and contribute only one hundred grand in pre tax
- 02:05
profits because paper sales are highly competitive and very low
- 02:08
profit margin And well there's Amazon And then there's the
- 02:12
mom and pop stationery biz with three little old ladies
- 02:15
in the back room happy to make minimum wage as
- 02:17
they draw calligraphy all day Well that biz might only
- 02:20
have three hundred grand of sales but contributes a one
- 02:23
hundred twenty thousand in profits only one tenth of the
- 02:26
revenue it contributes Maurin profits so profit margins matter and
- 02:31
the character or style or structure of the business that
- 02:34
product lines are in matters a whole lot Okay back
- 02:37
to coffee I cast my brass off has similar dynamics
- 02:41
First think about the retail store because it's serving food
- 02:44
It has to hold certain standards of cleanliness You know
- 02:47
city ratings and payoff To inspect a contributions Teo inspections
- 02:52
and something like that they have to offer parking and
- 02:54
have various benefits to employees It takes ten employees to
- 02:57
serve two million dollars in coffee at average load to
- 03:00
the company of sixty grand each or six hundred thousand
- 03:02
dollars a year In employee costs that is each employee
- 03:05
makes forty five grand a year and then cost to
- 03:07
the company Another fifteen grand in pension benefits insurance over
- 03:11
time Another cost To keep mall employees Well then it
- 03:13
has to rent the extra finished non warehouse space Another
- 03:16
hundred grand a year city inspections and that whole cleanliness
- 03:20
thing Then add another hundred grand a year in cost
- 03:22
And then there's the coffee itself and cups and washing
- 03:25
and breakage and product things that add another two hundred
- 03:28
Well it's reasonably profitable as a unit It contributes about
- 03:32
a million dollars to the bottom line is pretty good
- 03:34
and the owner's love it because the people who drink
- 03:36
there are coffee snobs and give almost free market research
- 03:40
in describing what they like or don't like about a
- 03:43
given roast Then there's the roasting equipment business flew high
- 03:47
end people high end product The owner's complain all the
- 03:49
time about the high salaries of the people who sell
- 03:51
the equipment The company doesn't make each roasting been theyjust
- 03:55
assemble it and then titrate it so that it can
- 03:58
chemically optimize whatever customer grind that the other coffee shops
- 04:02
want to build and serve on their own will The
- 04:04
network of coffee shops is amazing and they all respect
- 04:08
I cast my brass off because the PhDs in coffee
- 04:11
who make the equipment are also awesome on fourteen million
- 04:15
dollars or revenues The company when inspecting everything as a
- 04:18
standalone business meaning if they shut down the coffee retail
- 04:21
biz and the bean distribution biz well they'd have eight
- 04:24
million dollars in hardware product cost two million in assembly
- 04:28
cost and another two million in well everything else from
- 04:31
insurance toe warehousing shipping the website management so on So
- 04:34
this is odd The retail coffee biz pours a million
- 04:38
bucks in profits to eye CalFed and this business on
- 04:41
fourteen million in revenues pours in another two million So
- 04:44
the beans biz must be where the problem is At
- 04:47
nine million in revenues it's losing over four million bucks
- 04:51
Why spoilage Bad marketing campaigns high import taxes or duties
- 04:57
Ah highly competitive marketplace with everyone from grocery stores toe
- 05:01
Amazon being better at selling beans while the process was
- 05:05
the business love child of the idiot son of the
- 05:08
founder a common problem in American business But here the
- 05:11
process of selling mass beans into the consumer marketplace requires
- 05:14
a different skill versus selling high end coffee to snobs
- 05:19
The disconnect shined a light on the resource constraints in
- 05:22
human capital Not enough cos focus on this element the
- 05:26
brains of their employees and the ability to collectively contribute
- 05:29
to good or optimal answers in resource allocation You know
- 05:33
that's what it's all about Huge amounts of resource is
- 05:35
were being poured into growing a being distribution business which
- 05:39
is a low margin Almost anyone could do this thing
- 05:42
kind of business Instead of taking the nicely profitable retail
- 05:45
store in high end roasting business and being just nicely
- 05:48
profitably happy well the constraint here was the capital deployed
- 05:51
into the money losing commodity business of being selling and
- 05:54
sacrificing the ability to integrate even further backward in the
- 05:57
Assembly of the roasting hardware like they could have maybe
- 06:00
made a lot of profit over time and began building
- 06:02
their own Rose Sing hardware which they're also good at
- 06:05
Well the optimal resource allocation then takes the scarce resource
- 06:08
of human knowledge and making coffee roasters for small snooty
- 06:12
cafes And it spends more on that process shutting down
- 06:16
the mail order beans Direct marketing biz Well the change
- 06:20
makes the company go from losing a mil a year
- 06:23
so to making a few mil in cash profits which
- 06:26
it can then deploy Leveraging the genius coffee roasting brains
- 06:29
It already has to become more powerful in that smaller
- 06:33
but way higher margin business So that's one view or
- 06:37
one lens on how product choice decisions work in a
- 06:39
nutshell or well in a coffee bean shelf maybe something 00:06:43.058 --> [endTime] like that No
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