ShmoopTube
Where Monty Python meets your 10th grade teacher.
Search Thousands of Shmoop Videos
Cost Accounting: How Do Product Choice Decisions Work? 0 Views
Share It!
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
Up Next
GED Social Studies 1.1 Civics and Government
Related Videos
What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...
What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...
How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...