Bulletin HASKINS & SELLS 39
Solution to Cost Problem
T H E R E appeared in the June number of
the BULLETIN the following problem:
"For cost purposes, how should
graded leaf in the cigar industry be
priced? Should grade No. 4 be treated
as of the same price as grade No. 1,
provided it came from the same hogshead?
If this is done it will happen
that a month when the factory works
chiefly on low-grade tobacco may show
a loss, while a month when it works
chiefly on high-grade goods will show
an abnormal profit. If the grades out
of the same hogshead are treated as of
different prices, how should those
prices be determined?"
A solution to the problem submitted by
Mr. R. M . Wilbur, of the New York staff,
"Different grades of leaf tobacco
from the same hogshead should be
priced for cost purposes on a differential
For example: Assume that the
Banks Company purchase 1 hogshead
of leaf tobacco weighing—
400 lbs. @ $2.50 per lb., cost $1,000.00
Assume further that upon receipt at
their factory this tobacco is graded as—
No. 1 tobacco 200 lbs.
" 4 " 200 "
and that the value of one pound of No.
1 tobacco is four times that of one
pound of No. 4.
No. 1 — 200 lbs. X 4 = 800
" 4 — 200 " = 200
80% of $1000.00 = $800.00
20% " 1000.00 = 200.00