Music Trade Review -- © mbsi.org, arcade-museum.com -- digitized with support from namm.org
MAY
16, 1925
THK MUSIC TRADE
REVIEW
The Trade-in and Its Effect on the
Net Profit of Piano Dealers
The Fourth of a Series of Articles Based on an Exhaustive Survey Recently Concluded by The Music Trade
Review of the Part Which the Trade-in Plays on the Net Profit of the Retail Piano Merchant
Together With a Study of the Methods Which Will Remedy Its Evil Effects
LOSELY related to setting the allowance
on the trade-in is the question of the re-
sale price. This is essentially a matter of
proper cost accounting. It is a most important
factor in making the trade-in yield an eventual
profit to the retail dealer, and also one that is
too often neglected, with the result that at the
end of the year the black ink side of the ledger
usually shows results in an entirely different
manner than w T as expected.
The Basis of Price
The basis of the resale price of every trade-
in is, of course, the amount of the allowance
made. This is equivalent to the invoice price
in the case of new goods purchased. To this
must be added, first, the cost of putting the in-
strument in resale condition, and second, a
margin sufficient to cover general overhead and
net profit. The figure arrived at by this method
is the resale price.
Average Repair Costs
In the survey conducted by The Review
more than 300 retail piano merchants furnished
figures covering the average cost of putting
trade-ins in resale condition. Analysis of these
figures showed that the average cost of repair
work, including tuning, action work and replace-
ment of faulty parts, amounted to $30 per in-
strument. When refinishing of the case is re-
quired, this average cost mounted to $65. Con-
sidering that the merchants reporting were lo-
cated in every part of the country, and consider-
ing the variety of conditions which they have
to contend with, their figures showed a sur-
prising degree of similarity. Approximately 5
per cent of the merchants reporting stated that
they sold their trade-ins "as is," in a majority
of these cases disposing of them to second-
hand dealers without making any effort to re-
sell them in their own warerooms.
Selling "As Is"
One merchant, in his reply to The Review
questionnaire, stated that he sold his trade-ins
"as is," giving the buyer an estimate of the
work needed to put the instrument in playable
condition, and making the resale price the allow-
ance, plus overhead, plus that estimate. This
system is not widely used, however, and can
be left aside in considering the methods in gen-
eral use.
Charging the Expense
An interesting light has been thrown on the
methods in use in the average retail piano ware-
rooms by the replies furnished to the question:
"Is the cost of the repair work on trade-ins
charged to the merchandise account?" Of
those replying to that question, 62 per cent re-
ported that this was the method followed; 26
per cent stated that the work was charged to
the repair department; and 12 per cent to gen-
eral operating expense. Any analysis of this
problem will at once show that the two latter
methods are incorrect, and that the former is
the only method of handling this correctly.
The Merchandise Account
Charging the expense of repair work on trade-
ins to the merchandise account places this ex-
pense exactly where it belongs, since it is es-
sentially a cost. Trade-ins are carried in stock
inventory exactly as new instruments are, and
the basic cost of a trade-in is the allowance
plus the repair expense. That is the figure at
which they must be carried, providing the al-
lowance has been made upon the proper basis.
C
If an over-allowance is made in the face of
competition, the excess over the instrument's
true worth should naturally be charged to sell-
ing expense.
A merchant, in replying to The Review
o
John Doe Piano Co.
Trade-in Work Ticket,
JobNa.
Name,-
No..
WOFLK REQUIRED
WORK
TIME COST
MATERIAL
COST
TOTAL
Repairman-
Polisher
questionnaire, outlined the following system
which is used in his warerooms, in charging
this expense which seems an ideal one:
The moment a trade-in goes to the repair
department, a tag, which is shown with this
article, is attached to the instrument. The fore-
man of the department makes a close inspec-
tion of the instrument and writes in the space
provided what he considers must be done to it.
The men who work upon the instrument fill in
their time and the material used and then sign
the tag, which never is detached from the in-
strument until it is ready for display for resale.
Upon final inspection by the foreman of the
department, the card is detached and forwarded
to the office, where the cost of the work is
figured, and that, added to the allowance, repre-
sents the cost of the instrument in the mer-
chandise account. Trade-ins are handled in
this house exactly as are shipments of new in-
struments received.
The Repair Department
Charging the expense of this work to the re-
pair department, as a small minority of the
dealers still do, is an entirely incorrect method
of handling this matter. In the first place it
puts an unwarranted burden upon that depart-
ment in charging an expense against it with
which it has absolutely nothing to do. The
result is that this department shows a loss
through no fault of its own. This, however, is
not the most injurious side of this method. If
that was all that happened, there would be no
direct loss to the house.
Let us see what really happens when this
method is followed. The expense being charged
to repair department, it does not show in the
cost of the trade-in. As a result in nine cases
out of ten, the resale price of the trade-in is
simply figured on the allowance basis, and the
house gets no return for the labor and material
which have been put into the instrument. This
shows an eventual dead loss of approximately
$30 per used instrument sold. If 100 of these
are sold in a year, that means approximately
$3,000 for which there is no return, a consider-
able leakage, no matter how great may be the
business which follows this method.
General Operating Expense
If this expense is charged to general operat-
ing, and there is no reason at all why it should
be, a similar condition almost invariably ap-
pears, although some of this money is returned
through the overhead margin added to the re-
sale price. But this has the disadvantage of
increasing the general overhead upon all instru-
ments, both new and old, which are sold, and
where some lines are handled which have not
standardized retail prices, it puts their selling
prices out of proportion to similar grade in-
struments sold by competing dealers.
Anything in the nature of cost should be
charged directly to the merchandise account
where it really belongs. Correct methods of ac-
counting may appear of small importance to
some dealers, but it is invariably found that
where they exist there are consistent and per-
sistent leakages that in the long run have a
considerable influence in lowering the amount
of net profit made on any volume of business.
Overhead on Trade-ins
Practically every dealer replying to The Re-
view's questionnaire stated without equivoca-
tion that it cost as much to sell a used piano
as it did to sell a new instrument. Therefore,
it is essential that in setting the resale price
of a trade-in, the usual gross margin be added
to the cost of such an instrument. Of course,
this may be shaded at times to clear accumula-
tions of such stock, but when that is done it
should be realized that such shading constitutes
a direct mark-down, and it should be considered
in the same light as if this mark-down took
place on the sale of new goods.
Proper cost accounting is an essential factor
in eliminating the losses which constantly take
place in the retail trade on the handling of the
trade-in. Without it, it is almost impossible to
turn this source of loss into a source of eventual
net profit.
Kenneth R. McMahon Resigns
YOUNGSTOWN, O., May 11.—Kenneth R. Mc-
Mahon, vice-president and secretary of the Mc-
Mahon Piano Co., has severed his connection
with that company and is planning to leave
about May 25 for Los Angeles, Cal., to reside
permanently. Following several months rest
he plans to enter business there. Mr. McMahon
affiliated with the local firm five years ago, com-
ing here from Philadelphia. He will leave with
Mrs. McMahon and their children.
The Wisconsin Music Co., of Mayville, Wis.,
has recently filed papers of incorporation with
a capital stock of $25,000. Herman Rollfunk,
Henry Gutreuter and May Rollfunk are the
proprietors.
Consult the Universal Want Directory of
The Review. In it advertisements are inserted
free of charge for men who desire positions.