Costs and Competitive Prices 5 1

Then come (5) selling cost, the main items of which are salesmen's salaries and commissions, and advertising; (4) general administration, which includes salaries of the officers, and fees to directors, and general office expense, traveling, printing and stationery (not advertising), post age, telephone and telegraph, legal retainers and fees; (3) fixed charges, which include depreciation (if not put into a special reserve), insurance on the plant (which as a safeguard against fire, is a substitute for depreciation), taxes, and finally rent and interest. These items may cover either actual rents and interest paid, or hypothetical rent and interest, the normal amount of income on a passive investment of the same estimated value. The remainder at the close of the year, as in dicated in the shaded space, is profits in a wider or narrower sense, according as it does or does not include the amount normally attribut able to a passive investment.

§ 5. The problem of cost accounting. The difficult task of cost accounting is to break up this annual total into minute fractions and to distribute them in due proportion so as to tell if need be the cost and profit on any unit of product. Sometimes a large undertaking turns out a single, homo geneous physical product, as gas, electricity, water, bricks, salt, paper of a certain grade, spools, pig iron, etc. Here a unit cost and profit can easily be estimated from the total annual figures; but if the management desires to ascertain the cost of each of the series of processes through which each unit goes, the problem becomes more complex. Another type of under taking makes numerous kinds of goods, but in standard pat terns, such as tools, machines, stoves, wooden furniture, car pets, cloth, etc. Here the unit cost is estimated by following the product through the various departments, and this cost figure once fixed can be used continuously and repeatedly tested. Another type of business does all its work on special orders, such as job printing, electric installation, house con tracting, etc. The constant recurrence of somewhat similar kinds of jobs tests the estimates and permits a pretty exact allowance to be made for the usual delays and losses.

§ 6. Homogeneous products with unequal costs.

But no matter how carefully these unit-cost figures are worked out, the salesman is tempted repeatedly to ignore them. He sees a chance to sell below cost and still make a profit. This is the paradox of price cutting. It is an ever-besetting tempta tion of the business man, sometimes leading him to profits, but often to his undoing. The key to the mystery is already in our hands: it is that all costs are in some measure joint costs, and that every estimated several-cost has something of arbitrariness in it. Take a case where this would seem to be least true, where the entire output of a large industry is a single homogeneous product, such as water, electric current, etc. Here surely, if anywhere, the unit cost is certain, being

the simple arithmetic quotient of total cost divided by the number of units. But, no, as frequently here as in any busi ness the seller finds differences of a real character and is forced to assume differences in other cases in order to make a sale. In some cases he finds the estimated cost to be in correct, in others he finds it to be futile. The cost of reading meters, keeping up the service pipes, and rendering bills is greater per unit of water, gas, or electricity, for small users than for larger ones. This can be adjusted by making a flat fixed charge to each consumer for meter and labor, little if any more for large than for small consumers, and a separate charge per unit of product alike to all. For example, if elec tricity is charged at 13 cents a kilowatt hour, the bills would be Customer A, using 10 kilowatts monthly @ 13 cents =$ 1.30 Customer B, using 100 kilowatts monthly @ 13 cents = $13.00 If a charge of $1 a month per customer is made for meter, etc., and a separate charge of 3 cents per kilowatt hour, the bills would be Customer A, uniform charge $1.00 plus $ .30 = $1.30, actual price, 13 cents per k. h.

Customer B, uniform charge $1.00 plus $3.00= $4.00, actual price, 4 cents per k. h.

§ 7. Principle of charging what the traffic will bear. But where no such reasonable explanation can be and the 2 There are numerous other reasons for classifying customers, which must be reserved for discussion with practical problems. The example is sufficient for our present purpose of explaining the principle.

outward conditions all point to a uniform cost, the seller is repeatedly faced with a situation where at the moment and, as he says, "for practical purposes," he is impelled to assume a difference. The business is there as "a going concern," a large part of the charges are, or appear to be, fixed charges —in any event will not be increased by the particular increase of product in question, which will more fully and proportion ally utilize certain parts of the equipment. The new business can not be secured at the average rate paid by a similar class of customers (possibly because of this customer's advantageous position to buy somewhere else, or because he can produce for himself more cheaply than the average customer, etc.). A lower rate is made to get the new business, while the old cus tomers continue to pay the old rates, the result being that the total profits of the enterprise are increased. There is scarcely an enterprise, large or small, in which essentially this situation does not sometimes present itself.