Ed, I think you're missing a lot of costs. You didn't include bundled software and shipping, nor did you include things like factory overhead and administrative expenses. Also, you are assuming away the price to the distributor.
However, I'd like to focus solely on channel costs and profits.
Each member of the channel incurs costs and takes profit. Working the problem backwards, assume that the retailer makes 25%, then his expense would have been $800. Assume that this includes shipping of $25, which mean that the distributor sold it to the retailer for $775, but that included a profit of 20%, or $129, which means that the distributor's cost was $646. Subtract $25 for shipping, which means that the distributor was charged $621 for the box.
Now let's apply the 4% number. If $621 includes the 4% profit, then the cost was $597!!!
So explain to me how Compaq makes money in this deal except if the distributor and the retailer decide to make much less money.
Regards,
Paul
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