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Pra Howl Ways to Cut “4 ageéme 1) piCost=s in’ Carqo Nan ee : = ae is ns Conducted by H.E.STOCKER Vi Importance O Cargo Handling Costs in Making Freight Rates especially important element in rate making when rates are based upon the out-of-pocket cost or differential cost principle of rate making. The essence of this prin- ciple is that if some cargo can be obtained only at a rate which is less than the total cost per ton, it is profitable to accept this cargo, pro- vided there is a margin above the out-of-pocket costs incurred by the acceptance of the cargo. C esve handling costs are an Low Rate Shows Profit For example, a traffic executive was criticized for accepting 3000 tons of steel at the conference rate of S628 “ton, The genesal manager claimed that because this steel was accepted, the ship lost a large sum on the voyage. His position was based on a claimed cost of carrying cargo of over $7 a ton. After much argument trying to demonstrate to the general manager that since the ship necessarily had to make the voyage, 3000 tons of steel at $6 netted whatever profit there was above the out-of-pocket cost of han- dling, The traffic executive con- tended that this profit amounted to $2 a ton and therefore a profit of $6000 was earned on the voyage by the steel. He contended further that if the voyage showed a loss, it must be due to excessive operating costs, not to the acceptance of the 3000-ton lot of steel. The $6 rate was not a cut rate, so the rate struc- 28 By HE. Stocker ture in the trade was not disturbed by the acceptance of the cargo. In such cases the executive needs to know not merely one cost, but two: the cost that he will incur if he takes the additional business, and also the cost that he will incur if he does not take the additional busi- ness. He needs to know everything bearing on the question which will aid him in determining the amount of the rate necessary to make the company richer by accepting the business. If the voyage costs, overhead and capital charges total $10,000 and 2000 tons is the cargo, the cost is $5 a ton. If 500 tons additional is tak- en at a profit of $1 a ton, the re- sult is a profit of $500, or, since the overhead is still $10,000, and the tonnage has been increased to 2500 the cost per ton is only $4, a 25 per cent reduction, Hither way the ship is better off by $500. In either event there is a comparatively sharp increase in profit (or decrease in cost) directly due to the carrying of the additional business. Applying The Principle Several years ago the out-of-pocket cost principle was applied with profit in the acceptance of shingles from North Pacific coast ports to New York. The shingles were brought from the northern ports to San Fran- cisco by auxiliary schooners and then trans-shipped to intercoastal freighters. The through rate of $16 MARINE REvIEw—August, 1934 a ton was divided equally between the coastwise and the intercoastal lines. Although the intercoastal line obtained a rate 50 per cent less than the established intercoastal rate on shingles, it did not disturb the rate structure and it was able to earn a small profit above the out of pocket cost of carrying this added business. The rate was low but the shingles were carried under deck only when space was available and in addition, deck space was used to produce ad- ditional revenue. How to Determine Cost The principle under consideration. involves observing differences in cost. which correspond to differences in the volume or character of the cargo, hence the name, ‘‘differential cost principle.”’ The analysis to deter- mine costs cover the total costs of the business as a whole or one com- modity. For this purpose one ex- ample is not sufficient, To make the result accurate, a number of cases. must be obtained, In determining out-of-pocket costs. it is not necessary that these costs be ascertained with great accuracy. The accuracy of the information should be in accord with the purpose for which the figures are to be used. A. difference of 5 per cent in the cost of handling canned goods amounts to only 4% cents a ton, which is not large enough to decide the accept- ance or rejection of the business. When a contracting stevedore is