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.

What is the Value?

What is the value of a unit of tritanium?

You might think this is a trivial or even stupid question. You can go on the market and look it up using EVE Central's home page and say its selling for 6.01 ISK in Jita. There, question answered.

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.