V Pattabhi Ram and A V Vedpuriswar
Wafers was in a sour mood. She had this morning been taught “Make V Buy” and she was literally seeing stars. At times the good professor considered fixed costs; at times he coolly ignored them. Suddenly he would talk of “indifference points” giving her nightmares. She had thought that this blessed thing called indifference point which had haunted her when she studied Economics in her PE 1 was a thing of the past. Now it looked like it was transcending cost accounting.
Wafers’ professor had recommended a couple of foreign books. She also had to buy the new edition of a popular tax book. One of her teachers had suggested that procuring the Revision Test Papers (RTP in CA lingo) was a must. She also wanted to buy a self-help book that would pep up her sagging confidence. Then there was the ICAI’s suggested answer to be got. Yes, it would all cost money. But she knew that it was an investment. Better than the Enid Blyton series and the Harry Potter stuff that she had once egged her dad to buy for her.
“How much would it all cost?” asked Rinku, the reporter. Wafers did some quick math and said “Rs 5,000/-“. China, her friend from IIT, chipped in. “Well there is no need to buy them. We can have them Xeroxed”. He should know. After all, he and his friends hadn’t bought a single book. These foreign books on engineering cost a fortune. The guys would pick the original and have it photo copied. The Xerox shop owner had amassed a small fortune that way and had now set up a chain store of Xerox shops!
Wafers wasn’t amused. “Is photocopying all right? Aren’t you infringing intellectual property rights?” she asked. Rinku sneered. “When you copy from one source that’s plagiarism. When you copy from many sources that’s research.” Watching Wafers appear unconvinced China decided to tell her a story that his professor had once told the class.
In Taiwan, a book titled “Economics”, authored by a Prof Chung, was selling like hot cakes. Paul Samuelson, the Nobel laureate, caught hold of a copy of the book to find why it was turning out to be a best seller. And was shocked to find that the book was a faithful reproduction of his own masterpiece “Economics.” So Samuelson, along with his lawyer, flew down to Taiwan for a showdown with Prof Chung. After a few pleasantries Samuelson, the topic veered to the book. And Chung remarked, “Mr. Samuelson its all your ideas. I copied from your book, almost word for word.” Samuelson responded, “Don’t you know that there is something called copyright”? Chung replied, “Of course, I do.” “Then why did you copy?” asked Samuelson. “Is copyright not the right to copy,” asked Chung.
“Good joke,” sneered Wafers. China remarked, “You bean counters lack humor. You only numbers,” So, he decided to spell out the arithmetic. “The cost of photocopying is 0.40 per page. For 8,000 pages it would be Rs 3,200/-. Your purchase would cost you Rs 5,000/-. So would you photocopy or buy?” “Well”, Wafers tottered. “Purely from the money angle, I guess I should photocopy”. Ha, now she remembered. The professor had said, “When you do a make vs. buy decision the cost of making should be compared with the cost of buying”. She had scribbled that in as Rule 10.
Rinku chipped in. “I can suggest something better. I have a friend who will charge only Rs 0.30 per page but will plonk himself in your house for a week to do the job”. Wafers thought: Her family was paying a rent of Rs 10,000 a month. If Mr. Photocopier would stay in her house for a week, the rent for the space occupied by him could be about Rs 1,500. “Ha” remarked Rinku, “the copier guy wont pay you a nickel by way of rent.” She stared. He had read her mind. For the nth time Wafers told herself that she would have to attend a program on body language.
China asked, “Are you open to accepting Rinku’s offer?” Wafers computed. Rinku’s offer would cost Rs 8,000 X 0.3 + Rs 1,500 = Rs 3,900. It was higher than the Rs 3,200/- that the shop charged. She should reject the offer, she told herself. Then flashed enlightenment. The Rs 1,500 was irrelevant because her dad would have to pay the rent whether she photocopied or not, whether she studied her CA or not! So the relevant cost was only Rs 2,400 (8000X0.3). Eureka. Wasn’t that what was her professor’s Rule 10 (b). “The term cost of making means only the variable cost of making not the total cost of making”. Rent was a fixed cost and was therefore irrelevant. She would accept Rinku’s offer. Rs 2,400 was cheaper than Rs 3,200.
Suddenly she remembered what her landlord had once said, “If you add one more person to the household you will have to pay an additional rent of Rs 1,000/-.” True, it was unfair. But the landlord had talked of water scarcity and her dad had agreed. Now this meant that the additional Rs 1,000 is identifiable with the photocopier. The Rs 1000, she realized, was the specific fixed cost of making. The cost of photocopying now read Rs 2,400 + Rs 1,000 = Rs 3,400. She remembered her professor. “The cost of making is the variable cost of making plus the specific fixed cost of making”. Ha, Rule 10 (c) she recalled. She would have to forget Rinku’s offer because that, at Rs 3,400, was costlier than the shop (Rs 3,200) China had recommended.
China prodded. Suppose you have to photocopy 12,000 pages? Wafers did her arithmetic. Then the shop would cost her 12,000 X 0.4 = Rs 4,800/-. Rinku’s friend would cost her 12,000 X 0.3 + 1000 = Rs 4,600. At 8000 pages Rinku’s offer was cheaper. At 12,000 pages the shop was cheaper. Clearly there must be a meeting point. “Ha, that’s what the professor had called indifference point” she exclaimed to no one in particular. Now when would that happen? She realized that based on variable cost, Rinku’s friend was cheaper, but based on fixed cost the Shop was better. If she chose Rinku’s friend she saved Rs 1,000 but would lose 0.10 per page. Hence at 10,000 sheets (1000/0.1) things would even out. The professor had called it Rule 11. She remembered his words, “Up to the indifference point the option with the lower fixed cost is better; beyond the indifference point the one with the lower variable cost per unit is better”.
Photocopying had turned out to be pretty instructive! Decision making was turning out to be easy.
First published in the Hindu Business Line