B. Again, starting with a cash capital of $90,000 I expend $75,000 for 75,000 units of goods on Jan uary 1st, and expend $12,000 for personal services during January and $13,000 during February, ob taining $60,000 of cash income for 30,000 units dur ing January and $90,000 for 45,000 units during February, once more I have made a profit of $50,000 on the entire venture. Again, by identifying $30,000 of the initial outlay with the 30,000 units sold during January and $45,000 with the 45,000 units sold dur ing February, I am able to say that the $60,000 of cash income received during January cost me $42,000 and represented a profit of $18,000, while the $90, 000 of cash income received during February cost me $58,000 and represented a profit of $32,000.
Thus by identifying the cash outlays by means of the objects upon which they were expended, and then observing which of these objects were the means of securing the income obtained during any given pe riod, I am able to trace to this income the initial cash capital that was expended in its acquisition and meas ure the profit that it contains. The chief logical dif ficulty in the second case is in counting all of the $12,000 outlay for personal services during Jan uary as cost of the $60,000 of cash income received during that month; no doubt some of these services contributed to effecting the sales made during Febru ary. To associate them exclusively with the income received during January is an illustration of "busi ness conservatism"—a conservatism that is usually. though not always, justified.
C. Once more, assume that on January 1st, 1915, I expend $25,000 for raw materials, $30,000 for ma chinery, which during the first pat of 1915 I use up entirely in converting the materials into "finished goods," laying out $8,000 for water and fuel and $12, 000 for personal services in effecting the transforma tion. I then, have salable finished goods which have cost me an aggregate outlay of $75,000, an average of, say, $1 per unit for 75,000 units. If I sell 30,000 units during the remainder of 1915 for $60,000 cash, laying out $12,000 for personal services in effecting the sales, and sell the remaining 45,000 units for $90, 000 during 1916, personal services in effecting these sales costing $13,000, I have practically the same case as the preceding. Again, by identifying the initial cash capital with the raw materials, machinery, water, fuel and transforming services upon which it was im mediately expended, with the finished goods which re sulted from their combination, I am able to trace to each bit of cash income the initial cash outlay which was its cost and then measure the profit which it con tains.
D. Finally assume that starting with a cash capi tal of $60,000 on January 1, 1915, I expend $30,000 for machinery which I set up into a plant and that during the remainder of that year I expend $12,000 for 36,000 units of raw materials, 30,000 of which I convert into 30,000 units of "finished goods," spending $2,000 for fuel and water, and $6,000 for personal services in the transforming processes; that during 1916, I expend $13,000 for 39,000 units of materials, that I convert these and the 6,000 units left over from 1915 into 45,000 units of finished goods, spending $3,000 for fuel and water and $9,000 for transforming services; and finally that my machinery is all used up by this time. Suppose further that during 1915 I sold
27,500 units of finished goods for $55,000 cash, spend ing $10,000 cash for personal services and so forth in making the sales and deliveries, and that during 1916 I sell the remaining 2,500 units made during 1915 and the 45,000 units made during 1916 for $95, 000 cash, spending $15,000 for personal services and the like, in effecting sales, making deliveries and so forth. Then since I started with $60,000 cash and emerged with $110,000 cash and nothing else (there being no fresh investments in the meantime and no withdrawals of cash or goods for my personal use) I made a profit, during the two-year period, of $50,000.
3. Distribution of to the individual years, by identifying the initial cash outlays with the immediate objects of expenditure and tracing thru these to the finished goods, I may say that the 30,000 units of finished goods made during 1915 represented initial capital amounting to $30,000, or that they "cost" $30,000 or an average of $1 per unit, that the 2,500 units on hand December 31, 1915, "cost," or rep resented initial cash capital of $2,500; that the 27,500 units sold "cost," or represented an initial cash-capital of $27,500; and that the 6,000 unused units of mate rials "cost" or represented an initial cash capital of $2,000. Similarly I can say that the 45,000 units of unfinished goods made during 1916 identified $45,000 of "initial" capital or an average cost of $1 per unit and that the 47,500 units sold, cost or identified an "initial" capital of $47,500. "Initial" as here used does not mean "original" but simply that it was once in the form of cash; obviously $40,000 of the cash spent during 1916 was not on hand at the start but was received from the sale of finished product dur ing The initial capital identified by means of the fin ished product made during each year may be traced as follows: The apportionment of the outlay of $30,000 for ma chinery presents the greatest difficulty. Clearly this is part of the total cost of the entire income of $150, 000 obtained during the two years. But how much to assign to the $55,000 obtained during 1915 and how much to the $95,000 obtained during 1916 is the problem. This problem of the apportionment of the cost of machinery (the initial cash capital identified by it) , or any other article of equipment to the dif ferent parts of the whole income of which it is the cost or to the different parts of the whole service which it renders is the problem of "depreciation." Many methods of making this apportionment are in use and will be discussed in a later chapter. Here let us use the plausible one of apportionment according to the number of units of service rendered. This assigns 30,000/75,000 of the 30,000-dollar initial outlay for machinery or $12,000 to the 30,000 units of finished goods made during 1915 and 45,000/75,000 of it or $18,000 to the 45,000 units made during 1916.