Monday, May 19, 2014

Nice graphic showing "breakdown costs" for the physical/material inputs for Google Glass.

The Wall Street Journal has an article today regarding IHS's "break-down cost" of the much talked about wearable technology Google Glass.

Here is a chart showing the money cost of the tangible physical inputs---the stuff you actually see and touch.

The total material costs are roughly $152.47 (Google disputes this) and the suggested selling price is about $1,500. That is quite a profit, right? Not so fast..

Source: WSJ
Here is an excerpt from the press release from IHS (underline and emphasis mine):
“As in any new product—especially a device that breaks new technological ground—the bill of materials (BOM) cost of Glass represent only a portion of the actual value of the system,” said Andrew Rassweiler, senior director, cost benchmarking services for IHS. “IHS has noted this before in other electronic devices, but this is most dramatically illustrated in Google Glass, where the vast majority of its cost is tied up in non-material costs that include non-recurring engineering (NRE) expenses, extensive software and platform development, as well as tooling costs and other upfront outlays. When you buy Google Glass for $1,500, you are getting far, far more than just $152.47 in parts and manufacturing.”  
The portion I highlighted and underlined is a fancy way of saying these are Google's "Fixed Costs" for the anticipated production of glasses. The fixed costs cited above are costs incurred by Google before they produce even one unit of the wearable technology.

When we include all these up-front fixed costs and produce one set of glasses, well, that first set will be VERY expensive---we allocate the millions spent on research and development to that one set of glasses!

However, because those costs won't change as we produce the second, third...10,000th set of glasses then you can see the "Average Fixed Cost" of producing each additional unit is going to rapidly decrease.  More of that fixed cost is going to be spread out over a larger range of production.

Eventually the fixed costs will be an insignificant portion of the total cost of producing the glasses. The only remaining cost will the the firms "Variable Costs"---materials, labor, advertising, and all other overhead. 

If we add up Google's Total Fixed Costs and Total Variable Costs of producing the Glasses and divide by number they produce we will get the "Average Total Cost" of producing them. 

Compare that number to the number over all ranges of production and subtract it from $1,500 for each unit sold to get their "accounting profit".  

The future looks bright they gotta wear....Does Google Glass come in sunglasses too?
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