Since they are selling at a set price over cost, it shouldn't matter what the cost is. They still get their profit. Guess 15% just wasn't enough......:Sad:
OK guys this is what I mean.
The reason you run a business is to turn a profit so you create wealth.
However, under certain circumstances you can turn the same % profit but have a reduced capacity to create
true wealth.
Few business people understand that if you are selling imported goods, and your currency is declining in value, you can turn a profit but create less wealth.
Let me illustrate..
The original University Motors Deal was their Cost + 15%.
This deal was set when the U.S. dollar was worth $X in 200?.
At the end of 2002 one $U.S. could be exchanged for (i.e. it could purchase) various international currencies e.g. US $0.83 would have purchased Euro 1.00
Today $US 1.38 can purchase Euro 1.00
Your currency has declined in value against just about every other major currency you can name.
Therefore, if you hold a US dollar in your hand today it has 40-50% less ability to purchase other currencies, than it had in 2002. So in real terms your wealth (purchasing power) has declined.
Now lets consider how that affects your local business as a wealth-creating vehicle rather than a margin-taking vehicle.
The table below shows you the effect of currency depreciation on a businesses ability to create wealth.
Line one shows University Motors ‘Original Deal’ from their business owner’s perspective. It’s self explanatory.
Line two shows the some deal today. The only thing that has changed is the value of the US$. Because goods have to be purchased with depreciated currency it takes more of it to purchase the same goods AND those goods are then sold to local consumers for more depreciated local currency.
Line three shows that if the business is to create the same wealth from your depreciated local currency the owners must lift margin to 25.35% and that only covers the increased purchase cost of imported parts.
Now subtract wages and other operating costs from the margin and you would need to go to at least 30% margin to maintain the absolute value of the wealth created from the transaction.
This will piss off most consumers. Increasing prices (especially big increases) always does.
If the business is to keep creating the same absolute wealth for the owners, as the local currency depreciates further, the business can raise margins if the consumers will still pay the price.
But if the business cannot continue to create absolute wealth, (instead of absolute margin and reducing wealth) it is not an attractive business. It is a job. Actually, it’s a charity!
Understanding the difference between margin earnings and wealth, Warren Buffet traded his US$ holdings before the currency went into rapid decline so as to preserve his wealth.
The new building University Motors are in is not an import. It is mostly locally produced and paid for locally where a dollar buys a dollar. It is unlikely to be the cause of their margin increase.
University motors are running a smart wealth creating business and are not the bad guys here.
The bad guys are the idiots in the Federal Reserve and your government running up the national debt and devaluing your currency. They are literally robbing you of your wealth and your proof of this is as obvious as increasing retail prices.
Guess who gets to pay off that national debt?
You, your children and your grand children.
Anyway, I’m off topic and ranting. :ranting:
Go easy on University Motors. They are not the bad guys.
This explains more
http://www.youtube.com/watch?v=8pEiLHnjAiw
