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Cost Accounting: How Do Product Choice Decisions Work? 0 Views


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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.

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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

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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