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Date: 9 Aug 93 16:50:56 GMT
From: cis.ohio-state.edu!pacific.mps.ohio-state.edu!math.ohio-state.edu!magnus.
acs.ohio-state.edu!usenet.ins.cwru.edu!agate!overload.lbl.gov!dog.ee.lbl.gov!he
llgate.utah.edu!fcom.cc.utah.edu!u  (Tom Crook)
Subject: Profitability of Ada Educational Sales (was: Ada is not a failure.)
Message-ID: <1993Aug9.165056.13371@fcom.cc.utah.edu>
List-Id: <comp.lang.ada>

In article <CBCD3E.IrD@cbnewsl.cb.att.com> willett@cbnewsl.cb.att.com (david.c.
willett) writes:
>>From article <23s4tl$9ni@news.aero.org>, by doner@aero.org (John Doner):

(John Doner)
>> Development costs are sunk costs.

(David Willett)
>I can't agree with you here John, development costs are not "sunk".

Given the context of the discussion, I believe Doner is correct.

The context as originally proposed was that Ada vendors, with a product
already in hand, could afford to sell educational copies at a low cost.
The decision of whether or not to sell educational copies is being made
after the decision to develop the product.  Thus, previously committed
costs are "sunk" costs with regards to the educational sales decision and
need not be considered in pricing the educational product.

Fixed costs should have already been covered by the government and
commercial sales.  To make a profit on educational sales, a vendor merely
has to cover its variable costs to duplicate disks and manuals.

If, on the other hand, you are proposing a new product that from the first
depends on educational sales for profits, then the development costs are
not sunk.  You still may wish to assign more of the costs to
non-educational sales for marketing reasons, however.


(David Willett) 
>Every R&D venture I've ever been associated with or heard of, has a
>"break-even" point, which is calculated up front.  The development team,
>or champion, or manager (it varies with company) *MUST* break even by a
>particular date or have their head(s) handed to them by the backers (e.g.
>the Board of Directors).

Although this is very commonly used, it is not the best way to decide
whether to pursue a project or not.  A better way is to calculate the Net
Present Value (NPV) of the proposed project by discounting all the forecast
costs and revenues back to day zero of the project.  If the difference of
discounted revenues - costs is positive, the project should be profitable.

The NPV method correctly handles projects that are profitable but have
large up-front investments and long term payoffs.  Perhaps one of the
reasons so many companies (and their stockholders and the market itself)
are oriented towards short-term profits is the overuse of break-even
analysis.


Thomas Crook