Re: Fear of Life (was Microsoft, Automation)

Warrl kyree Tale'sedrin (
Mon, 4 May 1998 22:30:38 +0000

> From: Dan Fabulich <>
> Right. One final down, three to go. In the meantime...
> ChuckKuecker wrote:
> >I agree that a 'sunk cost' does not add to production costs, but it sure
> >DOES affect my ultimate profits!
> >
> >The 'sunk cost' needs to be covered BEFORE I can realize profits on my
> >invention. Otherwise, there is no point in the whole process - if I can
> >never recocver my R+D costs, why should I even think of creating something?
> I don't understand what you mean when you say that your costs must be
> recovered before you make a profit. You cover costs BY making a profit.
> That's the whole point. :)

I think you're confusing revenues with profit.

Revenues is every dime of income from sales or rental of goods,
services, or capital.

Profit is what is left of revenues after you pay all costs.

So you cannot cover a cost by making a profit.

You have to cover *all* costs before you make *any* profit.

There are various *categories* of profits, categorized by specifying
what costs are already paid and what aren't.

For example, suppose that you pay all your sunk costs with borrowed
money. You could have an "operating profit" which is your day-to-day
income minus your day-to-day operating expenses. But when you are
looking at "operating profit", you still have not made any payment on
all that money you borrowed, and you still have not paid your
business income taxes.

If your "operating profit" is not sufficient to make the payments on
the loan, your business is in serious trouble.

You also haven't paid depreciation. If you have a million-dollar
piece of equipment which is going to be worn out after ten years, you
had best be setting aside enough for depreciation that, when the ten
years are up, you can go buy another one: very roughly $100,000 per
year. If you fail to set aside a depreciation allowance long enough,
a critical piece of equipment will wear out and you won't have the
money to replace it. your business will die. This is important
enough that even the US Internal Revenue Service allows companies to
set aside money in a depreciation fund and consider it a business

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