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Cost Elements In Intermediate Trade

( Originally Published 1939 )

That selling expenses are a large factor in other lines than groceries and drugs is apparent from analysis of additional data. The Census does not give a detailed breakdown of costs for all types of intermediary establishments. A functional analysis of expenses has been made, however, for a sample of twenty-four different types of wholesale merchants and industrial distributors, each doing more than $100,000 business annually.

Importance of Selling Expense

Selling expenses were found to be the largest item, with administrative costs nearly as great. These two items, consisting largely of wages and salaries, together amounted to nearly 7 per cent of sales or about 57 per cent of total costs. Next in importance were occupancy, warehousing, and delivery expenses, each accounting for 10 to 11 per cent of total expense.

A substantial part of administrative expense, however, should properly be charged to selling. If this were done selling would be an even more important cost factor. Selling expenses are relatively more important in lines of trade with high total expense ratios. This is true of high-priced specialized products like furniture and industrial equipment.

The importance of delivery costs and of warehousing and occupancy varies widely among the trades shown in the table. Delivery costs are important for dealers in bulky and perishable products meeting with a steady demand; and in these kinds of business-such as dairy products, fruits and vegetables, and meats-selling expenses are relatively small. Warehouse and occupancy expenses are also relatively higher for bulky products like builders' supplies, plumbing and heating equipment and furniture, and low for ex-pensive and non-perishable goods like jewelry, clothing and shoes. As a rule, however, expenses for delivery and warehousing, which are usually regarded as primary intermediary functions, are relatively unimportant.

Other studies show the same predominance of the selling expense item. The Dun & Bradstreet analysis of operating expenses of conventional wholesalers for 1936, embracing seven different kinds of business, shows that selling accounts for 25 to 40 per cent of all costs, depending upon the individual trade. Also, as indicated above, a part of administrative expense, the other largest single item, should be charged to selling.

Similar studies of wholesalers' expenses for six lines of trade conducted by the Harvard Bureau of Business Research between 1922 and 1927 revealed the same range of selling and advertising expenses as compared with total operating costs.

In two regional studies conducted by the Department of Commerce, selling expenses of hardware wholesalers were found to be 32.6 per cent of total operating expenses, while furniture wholesalers' selling expenses were about 40 per cent of total expenses in 1929.

Payrolls as an Expense Item

Personnel costs make up a large share of most of the functional items of expense in intermediary trade-4.5 per cent out of 9.5 per cent in ]1935-and the proportion does not vary much among the various classes of dealers. Wholesale merchants, for example, had payroll costs of 7 per cent of sales out of total costs of 13.2 per cent. Manufacturers' sales branches, the next largest group of intermediary dealers, showed payroll expenses of 4.6 per cent compared with total costs of 10.1 per cent. Agents and brokers, with total costs of only 2.9 per cent, reported payroll costs of 1.5 per cent, again about half of all costs."

When payroll costs and total expenses are compared for intermediary dealers according to the kind of commodities handled about the same relationship is shown. In most lines of trade, the proportion of payroll expense remains close to half the total irrespective of whether the total cost ratios are high or low. An analysis of the costs of wholesale merchants in 1935, for example, shows that clothing and furnishing dealers had payroll costs of 7.5 per cent compared with total costs of 14.1 per cent. Electrical house-hold appliance wholesalers recorded payroll expenses of 9.2 per cent compared with total costs of 18.4 per cent. Payroll expense accounted for a somewhat larger proportion of the total, however, in the case of drug and grocery wholesalers-7.1 per cent and 5.2 per cent, respectively, compared with total costs of 13 per cent and 9.3 per cent.

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