Manufactured Cost or Sales Price, Part III

Manufactured Cost or Sales Price, Part III

Copyright 2007, Traffic World, Inc.

Q:

In the Jan. 29, 2007 issue, you wrote that claims on pre-sold goods that are lost or destroyed in transit should be filed based on the sale price, not cost of manufacture.

You illustrated by saying that if a widget cost $80 to manufacture but were sold for $100, and the company issued a credit memo to the customer for $100 but only claimed $80 from the carrier, it would "obviously" be "out $20."

But the writer would not be out $20 if he did this. The returning of the $100 to the customer is simply giving back what the customer already paid (but received no widget for). Then, the $80 claim makes the shipper whole for their manufacturing cost.

In an argument of $80 vs. $100, there''s little room to negotiate. How about if the direct and indirect costs of manufacture are $80 and the selling price excluding freight is $350?

The carrier did not accept title to the goods. Save for a specific contractual obligation, the carrier would not be liable for "downtime" or other such consequential damages. The difference between $80 and $100, or the difference between $80 and $350, could well fall in this category.

In addition, I think there are some assumptions left open if we decide that the transaction was 100 percent sure to culminate if not for the carrier error. Maybe the item was not the right size/type and would have been returned. Maybe the customer would have found it "expired" or not fresh and unusable.

What am I missing?

A:

You''re missing pretty much the whole point, I''m afraid.

I might point out that this correspondent is a carrier manager. Carriers are typically pretty loathe to pay sale prices, much preferring the lower manufacturing cost - the $80 vs. $350 postulate he presents is often not at all unrealistic.

But in cases of pre-sold goods moving to the buyer, I''m afraid the proper claim is indeed for the sale price. And properly so, as I''ll try to illustrate in a rather exaggerated example.

Our protagonist in this tale is one Mary Fortune, a maiden lady of a certain age who happens to own a company that manufactures and sells (what else?) widgets. Mary''s employees, themselves also of a certain age and not au courant with contemporary political correctness, refer to her as Miss Fortune.

As her name suggests, Mary is not blessed with luck. Not long ago a black cat crossed her path as she walked under a ladder, startling her so much that she dropped her purse and broke the mirror she carried inside. This all happened on a Friday the 13th, of course.

The following month all the curses struck at once; the carriers serving Mary''s plant managed to lose or damage beyond repair every single shipment she dispatched. The one bright spot was that they also paid every single claim promptly (now you know this is fiction) - for, however, only the cost of manufacture. So Mary, my correspondent suggests, didn''t make any money that month, but she didn''t lose any either. She broke even, right?

Well, how about her overhead - administrative personnel, the rent or mortgage on her plant, office furniture and equipment and so on? Not part of manufactured cost. How about payroll taxes, pension contributions, employee health benefits, etc.? Not part of manufactured cost. How about salaries to her sales staff, their expenses, the costs of processing the orders they bring in ... you get the idea.

Poor Mary capped off her monthlong ordeal with the indignity of being arrested for indecent exposure. She''d lost her shirt.

Do I make my point?

The law''s pretty clear about this. I''ve cited a number of relevant court rulings in my prior columns on this subject and won''t repeat them here. But every court I can find has held the same on this issue - when goods are moving under contract of sale, it''s the sale price, not merely manufactured cost, that''s required to make the claimant "whole" for its loss.

And they''ve used, I might point out, the very same logic that I hope my little story elucidates.

Note that even if every claim had been paid for the full sales price, Mary still wouldn''t have had a banner month - just an ordinary one. The carriers wouldn''t have been enriching her, they''d just be making up what she''d lost. As the law contemplates.

As for my correspondent''s suggestion that the sale isn''t complete at the time of shipment because the buyer might return the order for this reason or that, isn''t that reaching a little? Some shippers have pursued claims for retail price on goods that were not pre-sold, saying that''s what they would have received if the goods were later sold, but courts broadly refuse to allow such "speculative" profits. Seems to me speculative returns fall in the same category.

And the court rulings hold good whether the differential between manufactured cost and sale price is $80 and $100, as I originally suggested, or $80 and $350, as my correspondent mentions, or anything else.

What the shipper/claimant would have had if the goods had been delivered on time and intact is the sale price, nothing less. Therefore what the carrier who failed to deliver on time and intact, thereby disrupting the sales transaction, owes on the shipper''s claim is the same, likewise nothing less.



-- Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at P. O. Box 76, Morganton, Ga. 30560; phone, (706) 374-7201; fax, (706) 374-7202; e-mail, BarrettTrn@aol.com. Contact him to order the 536-page compiled edition of past Q&A columns, published in 2001, at $80 plus shipping.