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Author: sandhillroad Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 204061  
Subject: Re: The mystery that is Apple Retail Date: 12/30/2002 8:31 AM
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Let us start with the belief (if not fact) that accounting is as much art as it is science.

Even further, profit is really a concept that applies best to the total organization, not to a business unit. The profit of a business unit is even more art than science, and it is sometimes difficult to see whether it serves a useful purpose. The reason? Much of the cost of an organization is the cost of doing business as a total organization, not as an addable collection of separate entities. Who pays for research and development of the next generation of products? Who pays for projects that fail? Who pays for legal services? Who pays for advertising? The answer is the organization as a whole, not particular business units.

Also, the price sensitivities for various products in various markets will be different, so the optimum margins for those situations will be different as well. Therefore, you can not really compare margins and say one is doing better than another, for they the one with the better margin might actually be not as well at the one with the poorer margin, taking all factors into account.

The best approach is to select one reasonable method for allocating costs and be consistent, unit by unit and year by year in its application. This way, you may at least have a chance of knowing when things are getting better or worse.

So I just shrug my shoulders and comments regarding whether a particular business is making a profit or not. The only way to really know is to back up time, do it another way, and compare the results on the total organization. The question is, then, whether Apple, as a total entity, would be better off with or without the retail operations, taken over the long term. It is a hard question to answer, because you can't possibly consider all the second and third order effects that must be considered to arrive at the answer.

That's why the analysis should be done, but used as only one factor in making decisions, but not taken more seriously than it deserves.

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