But that's just the current price of tritanium and we all know price changes as supply and demand fluctuate, just like in this graph I screenshot today:
The reason I ask this loaded question is because as I entered dreadnought production and brought investors into my Project Vulcan operation, I decided to keep a closer eye on the books and more accurately track profits for dividend payout reasons. This led me into the question of the best way to calculate profit and that leads to what is the actual value of the minerals I use in building a ship.
The easiest answer, and the one I have chosen to go with as its the most obvious, is that the value of the minerals I buy is the price I pay on the market.
However, follow me along on this thought experiment. Say I buy a piece of trit at 2 ISK (there was a time...) and then use it to build a paperweight (no blueprint required) with a factory cost of 1 ISK. So it cost 3 ISK to make, correct? And I sell it for 4 ISK so my profit is 1 ISK, correct? But what if the market changes while my paperweight is building and the new price of trit is 5. Is my profit still 1 ISK or is it now -2 ISK because the cost of production went up to 5 (price of trit) +1 (factory costs) = 6 ISK?
Obviously, my wallet is 1 ISK higher so my profit must of been positive, right? Well, let's say I took my paperweight and reprocessed it back down to tritanium (assume perfect recycle and no overhead cost for this example) and I then sell that piece of tritanium for 6 ISK. Now my wallet is 3 ISK higher instead of only 1 from selling the paperweight.
In other words, should I calculate my profit based on actual wallet balances or potential wallet balances?
The real example is when I'm building a dreadnought, and the prices of minerals have changed so much between when I bought them and when I'm ready to sell the ship, should I consider the current prices of minerals and calculate profit based on the new prices?
As I said, the obvious answer here is no, and go with the actual wallet balance after selling as the profit, but I find the question fascinating for some reason.
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Anyone who gets into cap manufacturing and sells their product to market prices once the ship is completed is a mineral speculator. It is all well and good when prices of minerals are climbing, but not so much fun when prices are dropping.
ReplyDeleteEasiest question ever: calculate based on the market value of materials plus actual expenses at the time of sale. This applies even if the eventual calculation says you lose money.
ReplyDeleteIf you disagree, sell me the rarest item in your house for the price you bought it for.
What we really need (in New Eden) is a futures market. Of course in this situation you want options on futures which protects your mineral investment over the buy-to-delivery time.
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ReplyDeleteAs an accountant, you take the price that you paid as cost. The price of the paperweight would go up to 7 or 8 to cover the higher costs. If not, just buy all of the paperweights to reprocess them until the prices equalize again. This is why many manufacturers hedge their materials purchases (probably a bit harder in EVE)
ReplyDeleteJester - Just because you use the price that you paid for profit calculations doesn't mean that you use it to determine your selling price.
Yep. If building a single item it's fine to use actual costs incurred. But if running a longer-term operation, you start getting into purchases made over time. Oh God, shall we introduce him to FIFO, LIFO and average cost? And let's not forget about amortizing the cost of blueprints, which according to Universal Accounting Standards must be done over no more than 1 year.
DeleteI logged in to start with LIFO vs FIFO. I see my job here has already been done. Carry on.
DeleteIn economics, the value, profit, and revenue are all real values, calculated from actualized results. What you're describing is opportunity cost. Because you used the resources to achieve these actual results, what was the value of the best alternative option you could have pursued?
ReplyDeleteBut that's a theoretical calculation to talk about efficiency, given perfect prescience.
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ReplyDeleteI would have thought, that if you purchase a particular price and the market drops, then you just list at a price required for profit. ie you are selling for a fixed profit rather than opportunistic profit. Regardless of the market. Because eventually the cyclic will swing back and goods sell. Which would be a long term investment.
ReplyDeleteThat is one way to do it, but the downside is that if the market cycle is depressed for a long time, your isk is tied up in the item and can't be used to make more isk in the meantime. Sometimes its better to take a temporary hit just to free up the capital, imho.
DeleteAlways use actual prices. If you stockpiled trit to build a dread and trit prices go up (without dread prices), then don't build a dread but sell the trit. More money, less work.
ReplyDeleteYou seem to start to realize that trading (buying low, selling high) is much more profitable than actually doing something.
Given that the value of minerals is largely tied to the difficulty of shipping them around, I'm always surprised that trit doesn't migrate north of pyerite. Supposed rarity is largely meaningless.
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