Thursday, October 01, 2015

Valuable Feedback

In what was supposed to be a little throw-away philosophical post, What is the Value? turned out to be one of my most commented posts in quite a while, including some community heavyweights like Gevlon and Jester.

I think there was some real value (pun intended!) in some of the comments so I figured I'd repost them here and add my replies or comments.

First off we have Vince Snetterton:
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.
I don't think I necessarily agree with that. I think he's saying that since the changing price of minerals raises the prices of everything on market (for the most part), if you buy minerals at a high price and sell when they are dropping the lower ship price as the market depresses kill profits. Most of the time, capital ship prices react so much slower to market pressures, and demand/supply is has more influence on prices than base mineral cost, I think it insulates the capital market except when their is a massive price correction and demand crash like last summer.

Jester confidently (no one ever accused Ripard Teg of being timid) states:
Easiest 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.
If you disagree, sell me the rarest item in your house for the price you bought it for.
This broke my brain. Give me a minute. I'm having a hard time correlating the first two sentences with the last sentence because it feels like a false equivalency. Rare items are not necessarily more valuable but I think Jester is implying it is, like a first edition comic book for example, so assuming that interpretation I still have trouble correlating because the paper to make the comic book still costs pretty low, the value of the rare item comes from demand and supply, not material cost.

Regardless of my mangling of his example, his directive is one I've considered doing because it feels like a more accurate appraisal of profit.

Adam then replies:
As 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)

Jester - Just because you use the price that you paid for profit calculations doesn't mean that you use it to determine your selling price.
To which famous Dirk Macgirk adds:
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.
This is kind of what I'm feeling in my gut, that if I expand my operations any more it will be more accurate and efficient to run fiscal periods with expenses and assets and calculate profit that way per period. That's kind of scary real economics and I'm 20 years past my first and only economics course in university. This is where EVE moves from game to simulator for me.

Talvorian Dex says:
In 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?
But that's a theoretical calculation to talk about efficiency, given perfect prescience.
This is when I realized I was way over my head.

Finally Gevlon drops in:
Always 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.

You seem to start to realize that trading (buying low, selling high) is much more profitable than actually doing something.
Truthfully, a few years back I made my second fortune doing day trading in large expensive items in Amarr and while I found it profitable it did not satisfy the "want to make something" itch. PLus I found it took too much of my meager time to manage properly, whereas cap manufacturing  is a lot more offline.

Thanks to everyone for the amazing comments! Definitely gave me a lot to think about.

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