Hi everyone!
This post is dedicated to the different kind of profit and return calculation methods which can be used in the game. These methods can be used in planning investments.
The proper profit calculation method depends on several cicumstances, and may differ from subdivision to subdivision, but more or less can be divided into 4 groups:
1, production
2, production using resources bought for VIRTs.
-not renewable resources
-renewable resources
3, retailing your own product
4, wholesaling your own product
5, indirect investments and speculation (I will ellaborate on this in an other post)
So let's start.
1, Production
First of all let's indenitfy the factors which max influence profitability.
1. selling price
2. cost of raw materials
3. cost of labour
4, cost of inputs (energy, amortization etc.)
5. profit tax
6. custom duties
7, common tax for inputted earnings (CTIE)
But let's concentrate only on the first 5
In this case, the formula is quite simple:
Profit= (Selling price - cost of raw materials + cost of inputs + cost of labour) * (1-profit tax rate)
Custom duties
(I guess everyone knows what custom duties are, so I wil just skip this.)
CTIE
The common tax for inputted earnings is a tax which must be paid regardless if you are making profit or not.
It can be calculated as the following:
CTIE = Prime cost of the produced good * rate of CTIE of the produced good * profit tax rate.
Now we will se how the other 2 factors changes the formula.
Profit = ((Selling price - (cost of inputs + cost of raw materials * customs duty rates + cost of labour) * ( 1 + CTIE * Profit tax rate))* (1 - profit tax)
This is the basic profit formula for a production enterprise.
Of course, it is also possible to determine the profit first and solve the equation backwards to gain the selling price.
Now we will see, other less obvious measuring methods.
P/L
As most of the players know, efficiency is a crucial factor in the success of your business.
You can read more about efficiency and qualifications here:
So as we know, efficiency depends basically on 2 things: Your qualification, and the implemented technology level. Your qualification defines the maximum number of employees in a specific sector.
So you just do not have infinite workforce, which is a major constraint in profit calculations.
But why?
Because of the theory of "opportunity cost".
You can read more about opportunity cost here:
So we need to introduce a new method of measuring profit, namely the profit/labour ratio (P/L).
The formula for this is the following:
P/L = Profit/number of workers used
The P/L ratio depends on :
1, your profit rate
2, technology coefficient (technology level)
Each technology level gives you a bonus production percentage, which may have a major influence on the P/L ratio. You can find the charts here:
Using this knowledge you are able to determine the P/L ratio before you build a factory, so it is a very important factor in comparing different investments. You can check the data for each subdivision under "Analytics/References"
Estimated P/L = Estimated profit/number of workers * technology coefficient
2, Production using resources bought for VIRTs
Using resources bought for Virts in the production proccess causes several anomalies in the previously ellaborated profit equation.
First of all let's indentify the 2 cases:
1, not renewable resources
2, renewable resources
Non Renewable resources:
We will start with the 1st case, which is about mines and oil fields.
But before we begin, we must introduce 2 new definitions: accounting value, real value.
What is accounting value?
The value of resources according to the game
What is real value?
The value of resource according to the VIRT valuation.
A resources VIRT valuation looks like the following:
real value = VIRT price on the stock market * number of VIRTS used / field quantity of the mine
(if you would like to replenish your mines, I suggest to use an estimated future price of VIRT)
And here comes the twist:
The game do not use this valuation, but uses it's own which results in a totally different (much lower) price.
This phenomena creates anomalies in the profit calculations, because the custom duties and taxes are calculated using the "accounting values", meanwhile you should use the "real values" in profit calculations.
The real value adjusted profit equation looks like the following:
Profit = ((Selling price - (cost of inputs + cost of raw materials * customs duty rates + cost of labour) * ( 1 + CTIE * Profit tax rate))* (1 - profit tax) - (real value of used resources bought for VIRTs - accounting value of used resources bought for VIRTs).
If the profit would be negative than it does not worth to buy the new mine, you should sell the VIRTS (or you should not buy the VIRTs) on the stock market. If the result is positive, than it depends on the P/L ratio and your own decision wether it worth to invest or not.
Renewable resources.
Renewable resources can be fisheries, woodcutting camps, plantations and farms.
The theory is similar to how we treat the non renewable resources, however there are some differences.
The real and accounting value still stands, however the real value is defined by the player, as you have to define a planned return period (number of updates).
real value = price of VIRT * number of VIRTs used / planned return period * production
3, Retailing your own product
When you are retailing in a different country your own product it is imporant to optimize your tax payments, to pay as little taxes as possible. There are 2 methods for this:
1, paying profit tax in the country from which we export
2, paying profit tax in the the country where we are retailing
case 2:
selling price = prime cost * ( 1 + customs rate) + (determined profit margin + cost of sales) / (1 - profit tax rate)
Obviously you must ad the costs of sales as well.
Cost of sales = (office costs + store costs (rent, labour etc.) + branding cost + weighted store advertising costs) / number of goods sold
4, Wholesaling
Wholesaling is similar to retailing however there are some differences.
1, you must give a portion of your profit for the retailers
2, you should brand your products to gain advantage on the wholesale market.
3, you must indentify your target customers, must optimize your tax payments, and set up several warehouses in different countries if needed.
4, you must deduct the cost of sales from your profits
cost of sales = (office costs + branding costs) / number of goods sold.
Unfortunately, our login / management time is not recorded and broken down into a cost factor in this game, which in reality is an important factor for profitability.
Taken the factor time into consideration, ROI (return on investment) looks different for example in regard of
- opportunity cost
- retail vs wholesale
- small state enterprises (reselling output vs processing it vs auctioning off the unit)
This post is dedicated to the different kind of profit and return calculation methods which can be used in the game. These methods can be used in planning investments.
I agree with Mike, great post Sulaco. I need to spend more time absorbing your thoughts which I'll do soon.
Mike1
Unfortunately, our login / management time is not recorded and broken down into a cost factor in this game, which in reality is an important factor for profitability.
Taken the factor time into consideration, ROI (return on investment) looks different for example in regard of
- opportunity cost
- retail vs wholesale
- small state enterprises (reselling output vs processing it vs auctioning off the unit)
Mike, I really think about that game this way. There is the perfect way to run the company with maximum efficiency, maximum profit, no waste. But sticking to that when your company is bigger is time consuming, tedious and drives people from the game. I take the approach of the 80/20 rule. If, for example, I can wholesale for 80% of the profit and it takes me 20% of the time, then I do it. I spend more time making sure the big picture is right on track and cut all the corners in the micromanagement.
I think there are 4 kinds of players:
- players who play detail at the beginning and later on who still love the detail and keep playing the same way
- players who play detail and then leverage that knowledge gained to run auto-pilot (80/20) strategic companies
- players who play detail and eventually quit in frustration at the tedium
- and of course, players who never stick with the game in the first place
I do think the more you know how to run things "perfectly" in detail, the easier it is to then back off and run them higher level and maybe on a mass scale. And I think Sulaco's thoughts above need to be understood and built upon no matter how your run your company.
9.04.2020, 17:28. Subject: Question regarding the 'Solving the equation backwards' quote
Could you (or someone) please elaborate on what you mean by
'it is also possible to determine the profit first and solve the equation backwards to gain the selling price.'
I'm very curious about this, because I'm struggling a bit to set up the right prices to my products.
Thanks so much.
RTM
9.04.2020, 17:43
rodfblanc
Hi @sulaco
Great post, it helped loads.
Could you (or someone) please elaborate on what you mean by
'it is also possible to determine the profit first and solve the equation backwards to gain the selling price.'
I'm very curious about this, because I'm struggling a bit to set up the right prices to my products.
Thanks so much.
offcourse.
there was even a script available to automatically set selling prices at break even. i dont use that anymore, and im not sure if its still available.
most of the time, you cant just decide how much profit you want to make and then set those prices because to make that profit all your product needs to sell. best way to set prices is to look at the market, see what others are selling the same product for, then price your product slightly less or significantly less depending on how quickly you want to sell the product and see what happens.
Could you (or someone) please elaborate on what you mean by
'it is also possible to determine the profit first and solve the equation backwards to gain the selling price.'
I'm very curious about this, because I'm struggling a bit to set up the right prices to my products.
Thanks so much.
offcourse.
there was even a script available to automatically set selling prices at break even. i dont use that anymore, and im not sure if its still available.
most of the time, you cant just decide how much profit you want to make and then set those prices because to make that profit all your product needs to sell. best way to set prices is to look at the market, see what others are selling the same product for, then price your product slightly less or significantly less depending on how quickly you want to sell the product and see what happens.
Right, thank you. I think I got it now.
Agree, starting by market research sounds like the right order too...
