## Tuesday, August 23, 2011

### More on "More for Less"

Yesterday I did a very brief introduction to economics, from the point of view of our Excel Math curriculum. We help elementary-age kids learn to handle money, and we teach them frugality. Today I'll give you an example of the "more for less" and "less for more" concepts we introduced yesterday.

The Apple iPhone is a popular item. The best summary I can find this morning suggests that Apple has sold about 130,000,000 iPhones globally in 4.5 years. Notice that Apple's fiscal year is different from our calendar year. The chart shows fiscal year sales.

If the phones in the sales pipeline are sold by the end of the Apple fiscal 2011 year, the grand total will reach 150 million. I can personally account for consuming only 4 of those phones, 2 that I currently own and 2 more that I purchased but exchanged under warranty.

This data raises many questions:
1. Do the numbers reflect the production of phones, or the sales of phones?
2. Do phones I returned for service get refurbished and resold?
3. Are resold phones counted twice, or not (since I was given one in exchange)?
4. What is the inventory in the Apple stores and other sales channels?
5. Does everything eventually get sold?
6. How do we count disposal of obsolete inventory?
We'll set these typical accounting questions aside and tackle different questions instead:
1. How can they make so many (150 million) for so little (\$100-\$200)?
2. How can they sell so many (150 million) for so much (\$400-550)?
Here's a list of components of the current iPhone with my estimate of their costs in US dollars:
• \$50 Memory and processor chips
• \$40 Display and touch-screen assembly
• \$30 Misc components and packaging
• \$30 Camera, Bluetooth, Wifi, Compass, Sound
• \$20 Mechanical items (switches, jacks, plugs, cables)
• \$10 Accessories and Battery
• \$10 Production and assembly by Foxconn
The current production cost is approximately \$190. The average selling price is now about \$560. So Apple keeps about \$370 for concept, design, product management, advertising, sales commissions, shipping, inventory - and profit.

Now I can try to answer my two questions:
1. Apple makes the iPhones for so little by purchasing huge quantities of parts inexpensively along with efficient manufacturing using Asian subcontractors with low labor costs
2. Apple sells the iPhones for so much because they make calls, provide the calendar, keep our address books, take photographs, hold our music collections, play movies, and run 402,000 apps (as of today) - things that are more cumbersome to do - and expensive - without the iPhone.
Imagine the cost and trouble of buying separate devices (and paper) for mobile telephone, calendar, address book, camera, music player, video player, navigation system, compass, etc. etc. We know what that sum of money and trouble is - because 150 million of us were all using those techniques before we discarded them for iPhones.

This fits in with the Labor Value philosophy, where an item's value ( when one buys, sells or exchanges it ) is connected to the toil and trouble which it can save the owner.