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used, ascertaining the stevedoring cost is simple as there is a general rate for all cargo, or a general rate supplemented by a few or many spe- cial cargo rates. In cases where it is advisable to get a special rate from the stevedore to make the busi- ness profitable even on a differen- tial cost basis, the stevedore should figure his costs on the same basis as the shipping company. That is, he should charge against the par- ticular tonnage under consideration, only his out-of-pocket or differential costs, plus a small margin. These consist of labor and insurance, with possibly a small allowance for gear. When a company is doing its own work, costs of handling a _ specific commodity are determined by ascer- taining the gang cost per hour and dividing that by the estimated tons per hatch per hour. For example, if 40 tons of paper per hour is han- dled at a gang cost of $20, the cost is 50 cents per ton. Adding insur- ance and overhead of 25 per cent, gives a total cost of 62% cents a ton. The tons per hatch per hour-fig- ure is necessarily a guess but a guess made by an experienced stevedore, familiar with the particular condi- tions on his terminals. When the shipments begin to move, a check on the time used to handle a lot, number of men in the gang, checkers, also laborers, if any, will give the actual cost per ton. Obtaining an average cost covering small shipments gives a basis for fig- uring which is sufficiently accurate for practical purposes. Average Cost Not Applicable Using average costs of handling all cargo in matters of this char- acter is completely misleading be- cause the average includes both freight that is costly to handle and freight that is inexpensive to han- dle and therefore cannot indicate the cost of handling a particular com- modity. Analysis of the handling of the cargo as described will show the ac- tual effects of increased differential business as contrasted to conclusions based upon conjectures, or even con- clusions based upon estimates of ex- perts. Conclusions of experts are worthwhile only when facts are lacking. The analytical method has the advantage of catching that which ex- pert judgment might overlook, and prevents possible fallacies which oc- cur with the best of experts, It is necessary to have a margin to allow for the necessary inaccuracies in cal- culating the costs per ton. If the additional business covers all the costs which are incurred by accepting it, then the company can- not possibly be poorer for taking the business. If this business pays any- thing above the added costs, then the company is richer by _ that amount, whether it be one cent a ton or two dollars a ton. Experience indicates that a mar- gin of one dollar a ton is a safe mar- gin to use. This will take care of any unexpected costs such as more than or- dinary overtime due to bad weather or other conditions. Working on this margin, on the average, a profit will be made over the cost of handling business. Exceptions may be made to the one dollar a ton margin, when, in the judgment of the executive, the specific conditions surrounding the movement of a lot of cargo justifies the belief that no unusual increase in handling costs is probable, How Profit Was Increased It is this marginal profit that is the difference between a small or no profit, and a large profit in some companies. In one case, by applica- tion of the principle described in this article, the tonnage was increased from 1500 tons a sailing to 6000 tons a sailing. This added cargo made a big improvement in the prof- it position of the line because the ships had to keep the _ schedule whether the cargo was accepted or not, but the nucleus cargo was not sufficient for profitable operation of the line, The only objection, that has any merit, urged against acceptance of this differential cost business, is that if all or much of the company’s business was accepted on this basis, the company would go bankrupt. However, this is true only when the principle is abused. Carried to this extent it is not really the application of the principle but only an example of bad management and an attempt by the management to justify its acts by invoking the principle. The essential point to keep in mind at all times is that the out-of-pocket cost principle applies only with re- spect to added business which can be moved only by a rate paying some- thing above out-of-pocket costs, but paying less than total per ton cost of operating the ship, Furthermore every traffic decision should be treated as a possible precedent and a wise executive will avoid setting precedents which may result in un- profitable business by reason of com- ing to apply to a very large propor- tion of total cargo carried. In most cases application of this principle in the form of cut rates is objectionable and ultimately a losing proposition. When a cut rate pol- icy is followed great care and _ skil- ful judgment are necessary to avoid pulling revenues down to a point where the company is in serious financial difficulties. The above objection has no merit MARINE REeview—August, 1934 when it is simply a matter of equal- izing rates established by competi- tion, because in such a case the company gains nothing by refusing to accept the business and it makes a few dollars if it does accept it. Individual rates cannot be fixed by determination of total costs because rates must be based upon typical or average conditions and not reflect the variations in total cost as influenced by volume, character of cargo, weath- er conditions, strikes and accidents. A rate basis must in a general way be based upon all costs but in the ac- ceptance or rejection of a particular lot of business it is necessary to con- sider only the costs incurred by the handling of that particular lot. When cargo tonnage saturation point is reached, to prevent undue increase in costs, the first step is to endeavor to increase the capacity of present facilities. A modernization of cargo handling facilities on termi- nals and ships may frequently in- crease capacity of the line. First, an attempt should be made to im- prove methods without any expendi- tures for gear and other equipment. A stevedore increased tons handled per hour 30 per cent by improvement in method of landing slingloads on the pier and by training the men in the new method. For example, if sideports are cut in the ships, in- creasing the cargo openings from five to nine, it will be possible to load and discharge in less time, permitting the ship to make more yoyages a year, or permitting calls at other berths in the same port or at other ports for cargo which stows closer or pays a higher rate than the cargo being carried. Sideports can be cut in a ship’s tweendeck for approximately $1250 per port. If two ports are cut in each side between the hatches, the total cost would be $5000. This in- vestment could be paid for from sav- ings in cargo handling costs in about one year. However, in some cases sideports need be cut only on one side of the ship and in one case one port forward between the hatches proved adequate. Is the Investment Justified? If a large investment is required to take care of the additional cargo obtained under the _ out-of-pocket principle, the problem becomes com- plex and great care must be taken to make certain that the added in- vestment is justified from the point of view of prospective profits, When the investment is made costs of the additional business are _ increased above stevedoring, checking, ete.; to them must be added the capital charges on the investment, It is wise to distinguish carefully between eost of additional equipment which can be paid for within a few months (Continued on Page 40) 29