Friday, October 14, 2011

The Price

My daughter’s water heater recently went out and she had no choice but to buy a new one. Remember, cold showers are no fun at all, unless it’s high-summer, and it’s no longer high-summer. It’s fall now.

I was shocked when she told me what a new water heater would cost - in excess of ten thousand dollars. (Gag, choke, cough, faint, and fall to the floor.)

Over ten thousand dollars for a water heater? You’ve got to be kidding! That’s almost as much as a new car – a NICE new car! (Don’t forget, now, you can’t take the water heater for a drive around the block!)

Sure, she was buying a water heater that employed new-technology, the kind that doesn’t store a tank full of water that is constantly heated for you, but even so, I thought the price was more than just a bit steep. That, of course, started me wondering about how that lofty price came about.

So, let’s see if we can figure it out. We’d have to start with a base cost for materials. And instead of justifying the cost of a brand new new-technology water heater, which we know would cost more than a standard one, we’ll use the old standard water heater as a guide.

Let’s say, as example that the cost for materials for the “old-fashioned” kind that heat a tank full of water is a mere $1,000.00. That would include the ceramic tank, insulation, metal housing, copper piping to bring water into and out of the tank, and then, lest we forget, the gizmo (mechanism) that actually heats the water.

Oh, and there would also be costs associated with transporting the material to our facility. Let’s ship it by slow-turtle, with a modest cost of only $200.00.

Okay, now let’s put those materials on the production line. Adding to our initial cost of $1,200.00 for materials (and transportation) for ONE water heater, would be wages for the laborers in the shop that put all those materials together.

Let’s imagine that there are 5 workers on this particular production line. (It’s as mall company.) Each earns $100.00 for each tank constructed. They don’t need to earn much money, especially since they are just lowly “unskilled” production blue-collar workers.

(Blue collar – that means they all wear blue shirts, right?)

However, we can’t base our cost on just one worker’s wages, even though it only takes one of them to make the darn thing. We must factor all 5 workers into the equation, because each of them must to be able to construct the water heater. So, that’s another $500.00 (5 x $100) just for labor.

But, the workers can’t do the job alone. They need expensive production line equipment to help them do their job. Add another $1,000.00 for machinery costs. (That’s just one machine - at a greatly discounted price as a favor to the CEO.)

Our sub-total so far, is

…………………………...........................…… $2,700.00

Next, we have to figure in the cost of wages for our office workers, the ones who sell, the ones who collect the money and put it in the bank, the ones who write all the marketing materials, the ones who answer the phones, the ones who file the paperwork, and even the ones who clean the bathrooms. We also need to figure in the overhead costs for office supplies and equipment, and, of course, the building they work in and utilities needed. Let’s say there are another 5 employees who work in the office. Again, we can’t split the costs between all the workers, because that would again ruin our profit line. So, we are going to charge the full amount for one water heater per employee.

Let’s factor in office costs and office employee wages at $150.00 per water heater, per employee. (Remember, they are just employees and don’t need to earn very much money.) Again, we factor by each employee because it takes more than one of them to run that office. That’s $150.00 per employee, per water heater, times 5 employees, equals $750.00.

But, you know what? Our company also has to work on future developments, you know, the new water heaters that don’t have to keep a tank full of water hot at all times, and someone has to pay for that research now, not later. We are, after all, doing the research now, versus later. Let’s say we have 5 researchers, and as with the others, it takes all 5 to get the job done, yet we must factor for each. Let’s say another $500.00 per researcher (they have to be smart, you know, so they get a higher wage) – another $2,500.00 per water heater.

But, wait! We aren’t done yet! What pays for all the insurance the company needs to carry, taxes and other legal fees, advertising, distribution, theft prevention, and damage. That should be worth at least another $2,000.00 per water heater.

That brings our sub-total to

.............…………………………………………....………………………………….. $7,950.00

Now, you might think we’ve factored in all the possible costs, but there are a few more left. One is the cost of the facility itself, either rent, or mortgage. Oh, sure, we mentioned building cost up above with office expenses, but we all know it wouldn’t be realistic to not pad the cost, so we’re going to figure it in again. Let’s say that’s worth $300.00 per water heater.

Total cost now?

……………….………………………………………………………………………… $8,250.00

So, what would be our very last cost? Well, let’s don’t forget the CEO who needs to have expensive cars, yachts, luxurious log cabin ranches in the “wilderness”, and who needs to not only have a salary in the millions, but will get a “retirement benefit” when he parts company with the company. His salary? In the millions. His “retirement benefit”? Several more millions. And just who do you think will pay that paltrysum? Hmmmm?

So, let’s let him have $1,000.00 per water heater, all to himself. After all, he does want to buy a NICE luxurious log cabin ranch, doesn’t he?

Our total now comes to ..........................……………………....$9,250.00

But, we aren’t done yet, are we? What about the money the company regains when you trade-in (supposing you can) your broken water heater for a new one? The company can recycle those materials, right? So, let’s assume this CEO actually shows some consideration for you, his customer, and gives you the astronomical amount of $500.00 for trade-in. (We did say he was a nice guy, didn’t we?) So, now we get to subtract money from the overall cost – whoopee!)

Now, our total has been lowered to


That might be the end of it, but there’s one very important factor left to factor in. We realize that this company can’t stay in business if it doesn’t make a profit, and so far, all we’ve done is cover expenses (and CEO benefits). So, how much profit do you think the company needs to make?

When I was younger, my father once explained to me that in America, at that time, there were laws in place that limited companies to figure in a 20% profit margin, and they were supposed to be able to cover all overhead costs AND make a profit from this sum.

However, we all know that these days, that’s a laughable amount. Only 20% profit? Ha,ha,ha,ha. (Where did those laws go, anyway?) I’ve seen commercials on television boasting a 300% profit margin. Don’t believe it? Think about the oil companies.

A few years back when gas prices kept going up and up and up and up until they reached ridiculously high rates. We, the general public, were told the increases were caused by increases in the cost of crude oil, and that the oil companies weren’t in the least responsible for the absolutely insane price hikes.

Yet, three months later, those very same oil companies were boasting, and I do mean “boasting” – and let me quote – “record breaking profits” in the neighborhood of billions of dollars “per quarter”.

Personally, I fail to see how the price hikes that were supposed to be caused by increases in the price of crude oil could result in “record breaking” profits – per quarter – to the tune of billions of dollars. Having your cost for raw materials and overhead costs increase does not, I repeat, NOT produce “record breaking profits”. Yes, some one was lying.

But, I digress. So we have between 20% and 300%, or in layman’s terms, billions of dollars of profit. Well, our water heater company needs to make a tidy profit too. (How else are they going to afford that CEO’s benefits?)

Let’s be generous again, because we should all be respectful and take pity on that poor mistreated CEO, and set that profit line at 150%. (Sure wish it was my company!) That’s a profit of $1,012.50 per water heater. Oh heck, let’s just round that up to a nice even $1,013.00.

But, is our company the only one who needs to make a profit off this one sale? My goodness gracious, NO. We haven’t added in profit margins for distributors and retailers yet. They don’t manufacture anything. They just move and sell your product. Even so, their profit margin is important, too. So, let’s be generous again (aren’t we nice?)

Let’s give the distributors (who really don’t have much to do) a profit of $500.00.

Let’s give the retailer, who does slightly more work than the distributor, a profit of $700.00.

So, what is our total cost to purchase a new water heater?


But wait, you say! Your daughter didn’t buy an “old fashioned” standard water heater. She bought one with new-technology that eliminates the need for a tank that constantly heats the water. Right?

Yep. That’s right.

And we already factored in research costs, right?


But that was for future research. What my daughter is paying for is research already complete, tested, and on the market. Surely that’s worth a few more dollars.

So true. (You knew we wouldn’t get away without having to pay for one more cost that we already paid for, didn’t you?)

Sounds like another $2,000.00 to me.

And that, friends, brings us to that tidy little sum of “in excess of” ten thousand dollars.

So, our Grand, and Final Total is ………………………………………………………………… $12,963.00

Quite a bargain, eh?

(You bet! And on top of that, she gets to pay delivery fee, state and local taxes, and – of course – installation. Oh, yes, and she also gets to pay for all the water damage and clean-up from when the old water heater broke.)

(What? There is an error in my addition? Don’t worry. The customer will never know.)

By the way, I realize that water heaters really don't cost tens of thousands of dollars, but if there are toilets out there for sale in excess of $6,000.00, as recently stated on YahooNews!, then why couldn't water heaters cost that ridiculously much too? But, the point of this post isn't the exaggerated price of a water heater. The point is to show you how the ridiculously exaggerated prices we all pay daily come about.