In rec.aviation.piloting Le Chaud Lapin wrote:
On Jun 20, 4:55?pm, wrote:
In rec.aviation.student Le Chaud Lapin wrote:
Accountants define material cost to be the cost of the components from
which the system is synthesized, not from the tools used to design or
create the system.
For example, the material cost of an iPod would include its hard disk,
RAM, ROM, resistors, capacitors, dials, faceplace, battery holder,
wires, mounts, shock absorbers, etc. ?It would not include
dehumidifier, blower, oscilloscope, spectral analyzer, or other factor
equipment used to manufacture the product.
The material cost of software, if sold in a store, would include the
cost of manual, the disks, and the packaging.
Compilers and hardware do not factor into the material cost of
software any more than an oscilloscope factors into the material cost
of an iPod.
To determine what components are considered "material", move the
product over a large distance. ?Whatever components move with the
products, those components are considered material. ?Those that stay
behind are something else.

Therefore you saying "the material costs of software is $0" is about as
usefull and insightfull as saying "watermelon has no bones".

Not true.

Accountants define material cost as above becasue material cost is a
per-unit cost that cannot be amortized. It is a necessary evil of
selling a product.

Let's take an example:

I can buy a new Sony DVD player for about $50.
I can buy Microsoft Flight Simulator for about $50.
Let us say that the development cost for the DVD player is $2 million.
Let us say that the development cost for MSFS is $5 million.

Sony and Microsoft sell their respective products to make a profit.
Let us assume that the market for each, in terms of number of
consumers, is exactly 1 million in 1 year. In that case, each product
will generate gross revenue of $50 million. But there is a problem: in
addition to the development cost, there is a per unit material cost,
the cost that the Microsoft and Sony must pay for the components that
form the product.

In the case of the DVD player, we assume that the material cost,
including resistors, capacitor, laster, motor, stabilizers, cases,
manuals, and packaging, etc. is $35, yielding a per-unit profit margin
of $15.

In the case of MSFS, the per-unit material cost is due to the manuals
and packaging, which we conservatively say costs $5, yield a per-unit
profit margin of $45.

If the packaging is eliminated, as is often the case, then the
material-cost effectively goes to zero for MSFS as does the
distribution cost. The per-unit profit of the software then becomes
the entire $50. If the packaging is eliminated from the DVD player,
the profit only rises to $20.

If, upon release, 1 million units of DVD player are desired, Sony can
expect $20 million in revenue.

If, upon release, 1 million units of MSFS are desired, Microsoft can
expect $50 million in revenue.

If both companies determine through market research that $7 is the
magic price point for each product, where demand becomes effectively
unsatiable, meaning 100 million units,...

Microsoft can sell 100 million at $7 for $700 million in profit.

Sony will not be able to sell and units because $7 is below the price
they need to sell to avoid a loss.

This is why software companies succeed even with marginally-desirable
products. The material cost and distribution costs become close to
zero, allowing them to test demand/price elasticity over the full
domain of variables. Also, problems with suppliers are almost non-
existent, as the suppliers are only used to supply tools that make the
products, not components of the products themselves. This eliminates
opportunities for the suppliers to "ride the market", where they know
a priori that a component is only used in, say military applications,
and will charge exhorbitant fees for the part simply because they can.

Also, the "manufacturing" cost of software is essentially zero:

To make 1 million DVD players, there is a per-unit manufacturing cost
of operating the assembly machines (and people) is some number greater
than 0.

To make 1 million copies of software, the per-unit manufacturing cost
is essentially zero.

These facts becomes more clear when the software becomes downloadable.


Therefore you saying "the material costs of software is $0" is about as
usefull and insightfull as saying "watermelon has no bones".


--
Jim Pennino

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