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Wednesday, April 6, 2011

Opportunity Cost - IRL Case Study


Opportunity Cost Gone Wrong
A Case Study of Opportunity Cost In Real Life

I did a couple of posts on opportunity cost that both brought out some great discussion in the comments section of each post.  You can review those 2 posts on Opportunity Cost if you need to get caught up to speed.

Opportunity Cost - A Listener Question
Opportunity Cost Part 2

The Bake Sale
Shortly after I did those posts on opportunity cost, we started a fund raising bake sale at work.  Employees were to either bring in baked goods to sell to employees and customers or make a cash donation that would go towards the cancer charity that the proceeds would be going to.  It seemed like a good idea, but once I started to look into the costs and profits I soon began to question the thinking of the other participants.

The basic set-up was to have everything cost 50 cents each on the baked goods table and all money raise would go to the cancer charity. 

I began to look into the cost to create these baked goods as well as the portion sizes and return on investment.  This is where things were starting to not add up for me. 

Let's look at one example.  Someone baked brownies and brought them in for the charity sale.  The divided the large brownie into 9 pieces (twice the size the food label showed as appropriate portions) packaged them in some fancy baggies and added a pink bow to hold them closed.  Then they added a sticker with the price of 50 cents.  I instantly started to run some calculations in my head as I am also a cook and brownies are one of my specialties.

I thought, "If we are selling these at this low of a price for this portion, then couldn't we raise more money by just donating the money it cost to buy the ingredients and skip the bake sale all-together?"

Digging Deeper Into The Brownies

Dozen Eggs $1.19
Brownie Mix (boxed) $2.29
Vegetable Oil $1.29
Total out of pocket:  $4.77 plus tax = $4.80

Brownies Were Cut Into 9 Servings
Cost per serving = $0.53
(This doesn't even include the fancy baggies, pricing stickers, or pink bows that were used to decorate each serving)

The fact that you have a bit of oil left and 9-10 more eggs left over is irrelevant as we are looking at the cost you came out of pocket vs the donation amount earned.

So yeah, in this example it would have been better to just donate the $4.80 to the fund instead of wasting time and effort making brownies to sell at a cost less than it cost to craft.  Even if all 9 brownies sold, the total raised was only going to be $4.50.   To further compound the poor decision,  management was matching all funds raised with an exact amount.  So you cost yourself $4.80, but only raised $4.50 (if all sold).  So $.30 less when doubled makes $.60 you cost the fund raiser, when you could have just donated $5 and been much more efficient.

Not all the brownies sold.  So now you've really wasted your time and money.  The even crazier thing was the brownies were the closest priced item to breaking even.  Everything else was selling for 50 cents as well and the crafting cost on gooey butter cake and other fancier items is much higher than the cheap brownies.

Someone even went as far to buy a premade gooey butter cake, which costs around $8.  this cake was split into 9 pieces and sold for 50 cents apiece.  Really?  You cut a $8 cake to make $4.50?  Just donate the $8 you fool!  After the management doubles that donation its $16 vs the $9 if all the cake pieces sold.

Moral of the Story for WoW

When thinking about crafting your trade goods in World of Warcraft, always use your brain.  The basic formula to follow is this:

Sum of Parts > Crafted Good = Sell Parts
Sum of Parts < Crafted Good = Sell Crafted Goods

A wise goblin doesn't craft to lose money.  Crafting should only be done if you are adding value to the item and you can sell that item for more than the cost of the materials required.

PS:  What did I do for the fund raiser?  Well, I bought baked goods for stupid low prices and got food with my donation.  Like any good goblin, I got the most for my money.

19 comments:

  1. A good read, basically summarises what any good goblin should already know - total costs should not exceed revenue as it results in a net loss.

    The last sentence made me laugh out loud XD

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  2. Ooh! As a mother of 3 boys, you have just stumbled upon one of my biggest pet peeves! Frigging funraising bake sales! ugh. The schools here do them all the time. Most retarded things ever on so many levels.

    What if your opportunity cost however is free. Like let's say you get Hostess or someone to donate all the goods to you and then sell them for profit. Would it matter less if you sold them for a complete pittance of their actual value, or would you be justified since they were simply handed to you?

    This is the dilemma I recently faced. One of my competitors quit the game recently and gave out a lot of his stuff. He gave a large amount of gold and items to random people in trade for doing miscellaneous tasks, but to me he unloaded guild tab upon guild tab of old world items. (He hadn't playedsince cata came out so all the stuff normal people unloaded at the end of wrath he had stored up in excess) I passed on some of the items to others, used some for leveling my alt professions, and was then left with just unbelievable stacks of things that in small amounts are great sellers, but on my server (which is microscpically small) I was skeptical would ever be unloaded in any timely manner if I were to sell for some of the current prices.

    So, I thought to myself, does it really matter if I undercut everyone "normally and get full market price, or do I simply just want to unload some of it quickly. I chose the latter option and figured since it was technically free, that I could utilize the overinflated prices of what some sellers had the items going for, to kind of help sell mine. Like even if people did not need or want this item, it would show up on their add-ons as a must have for resale profit cuz mine were so far below the current selling price of others.

    I was right, a good portion was bought up by one of the other sellers, and I noticed some of the names who bought some were back up relisting them, but the amount of whispers I got from annoyed people was absolutely astounding. lol and I am still left with incredible amounts. There is probly 101 different ways I could unload some of the stuff other than selling the mats raw, I could have crafted things, or crafted and de'd and in the case of the cloth I did craft like a thousand bags and saved the rest as bolts. A lot of it simply came down to laziness on my part.

    Anyways, at the end of the day I started to wonder if I was being as bad as the people I always talk shit about, "but my mats were free cuz I farmed them!" I mean technically I would argue but mine truly were free, though the end result seemed to be kind of bad, because I left the market oversaturated on some things and am also still left with a large amount of overstock.

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  3. Wow, the verbosity of my post scares even me. I'm gonna go take my large pot of coffee and go hide in the corner now!

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  4. @Skorpsy

    Not ignoring your comments and questions....stay tuned for tommorrow's post.
    :)

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  5. A little nit pick about the price break down of the brownies. They only used 2 eggs in the brownies, so thats already 99 cents you can knock off the cost to produce, since I'm sure they used the extra eggs somewhere else. Also, they only used a portion of that vegetable oil i'm guessing, so that again brings production price down. I'm guessing they do baking anyways so they didn't only buy the eggs and oil for the bake sale, so the out of pocket cost is only the eggs and oil they actually used, as the left over eggs and oil can be made into other things (probably another batch of brownies for her family alone).

    I get what your saying, but I disagree with your math.

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  6. @Xsinthis

    As I already said in the post:
    "The fact that you have a bit of oil left and 9-10 more eggs left over is irrelevant as we are looking at the cost you came out of pocket vs the donation amount earned."

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  7. And its probably a wash after you figure in the non-food items required to bag, sticker, and bow each item (also stated above).

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  8. Thats what I'm arguing, cause they didn't use 1.19 worth of eggs, then used 0.20 worth of eggs. Similar with the oil. Its not like the rest of the eggs or oil were ruined.

    A package of 20 ziplock bags cost 2.97. So each baggie costs 0.15. Don't know about stickers and bow's, but i assume they're much cheaper. They still might have been able to break even on this. Well, if you don't include time ^_^

    Just because you buy eggs by the dozen, doesn't mean the eggs you don't use for this particular product have to be counted as well.

    If you buy volatile life's in the stacks of 200, you don't count the cost of the whole stack towards each flask do you?

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  9. @Xsinthis

    There is a big difference here as in you can't purchase eggs individually, where with volatile lifes you aren't forced to buy a stack. You can buy just what you need.

    If I need 1 baggie and I buy a box for $3. It's still $3 Out of Pocket cost.

    If you run out you are forced to buy the whole package.

    That's different in WoW, where you can buy singles.

    Regardless, the point is not what each item cost, but how much more efficient it would have been to just donate it all.

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  10. Yes but you can still use those extra eggs for something else, so while you purchased 4.80 worth of materials, you didn't use all of it and the stuff you didn't use shouldn't count towards production cost. Assuming it took a 6th of the oil, your only looking at 0.20 with the baggies per brownie, a 0.30 profit (not including the sticker and the bow, or the time).

    Could it be done more efficiently? Yes. Would you have still gotten the same amount of money? Possibly not. Kids are more likely to pressure there parents into doing this. Plus teachers can make it a requirement, while they can't put nearly as much pressure to straight up and donate. There are much more forces and factors at play here than simple cost/price calculations.

    It's really irrelevant in that example because the parents are pretty much bullied into making the baked goods, and so straight up donating isn't an option. Plus it bolsters other things that you can't assign monetary value too.

    After finishing this I just realized your example was a charity bake sale, not a school bake sale. Either way my points should still be valid.

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  11. Plus, this shifts the income from the old ladies who usually do the cooking and donating, to the hip youngsters with money they would normally spend on drugs, booze, and sex lol ;)

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  12. It's not a school bake sale I'm writing about here.

    We are talking about grown adults at my full time job who are dumb enough to buy an $8 gooey butter cake and cut into into 9 pieces to sell for 50 cents each.

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  13. Yea thats pretty stupid, not arguing that lol.

    But that person might not have donated the $8 or even the $4.50 if he didn't have to show up with cake. So it makes sense from the companies/charities point, not from the individuals lol

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  14. Great post Cold. This is a topic that is often not understood by the player base even though it is often written about. Your post does a great job of making the subject understandable and will hopefully trigger a little ligt bulb to go off in some player's heads.

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  15. I've never seen worse math and logic. What a terrible comparison. Normal people have eggs and cooking oil and baggies in their homes at all times. No one had to buy eggs or oil just for brownies, they used what they had already, which would have been used at some point anyway. Why you add the cost of 12 eggs and a whole bottle of oil is beyond me.

    Brownie mix is $.99 on sale all the time. Eggs are $.99 a dozen, so $.08 each. Half a cup of oil is like $.25 tops. Baggies are $.02 a piece.

    So that's a cost of $1.58. A massive difference from the nonsensical $4.80 you base your argument on, and a big profit if all sold.

    Lame.

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  16. Interesting post, but you didn't actually touch the issue of opportunity cost.

    You're (correctly) talking about the foolishness of selling at a loss, and how it would be better just to donate the money. Absolutely true. But to include opportunity cost, you have to also penalize the activity to include the *value of the time spent* on that activity. Writing a check doesn't factor that in.

    To factor in opportunity cost, let's say that making the brownies took 1 hour of actual time (shopping for ingredients, mixing, checking for readiness, setting to cool, cutting into pretty squares, adding pretty ribbons, sitting there selling them, eating the leftovers, cleaning up, plus a tiny fraction of the time that will be spent on diabetes-related doctor visits in the future, etc.). And say your time is worth $20/hour. The opportunity cost loss is $20! Those brownies cost you $4.80 plus $20, or $24.80, and you didn't even recoup $4.50.

    You get the matching corporate funds regardless. As you say, write a check instead!

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  17. Uhhhhh I don't know about you, but when i get home from work, I don't get paid whether I'm making brownies or not. That's not the way real life works. Value of time spent has no bearing on free time. So there is no opportunity cost loss.

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  18. I agree with WoWMidas: you had an interesting point, but didn't really cover opportunity cost.

    In Wow, the reason mages can charge 20g+ for a portal is because when you are playing a warrior you cannot play a mage at the same time. Or you can charge 20g+ for an item that sells from a vendor in Winterspring, because no one wants to travel across Kalimdor.

    But yeah that fundraiser sounds ridiculous. 7-11 charges $1.19 for a brownie, a fundraiser should go for at least more than that.

    Anyways love your blog!

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  19. @Bob

    The loss is there. Anyone paid by the hour has an immediate loss, and anyone with a fixed salary foregoes income through effort. At the margin, less time put into your job = less pay down the road. Maybe your $2,000 raise only ends up as $1,000 because you didn't put in the extra time on that one project (baking brownies instead) and it ended up late.

    I guarantee you there is an opportunity cost to your time. It's what makes you spend $9 on lunch instead of 15 minutes bringing a lunch from home that only costs $2.50. Or some other similar tradeoff. And why you'd be unwilling to work for me for minimum wage.

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