April 25, 1922 



HARDWOOD RECORD 



27 



be no uniform selling price by agreement. Production costs is a ques- 

 tion of fact and not one of theory or agreement. Cost varies more or 

 less in every factor>% indeed will vary in the same factory on the 

 same product, and scientific cost accounting sliould reflect the true 

 cost in each case. 



List Cajinot Result in Uniform Price 

 This bears directly upon one phase of the Milhvork Cost Bureau's 

 activities -which would be clearly understood. To determine the cost 

 of any stock product where each day's operation is practically a dupli- 

 cate of the preceding day, it is comparatively simple. However, in the 

 case of odd work, where no two days' operation is the same, and in the 

 case of a planing mill involves determining costs, first, of stock goods, 

 carried in stock and purchased from manufacturers specializing in 

 that particular line, but frequently made in small quantities by the 

 planing mill in supplying shorts; second, cost of hundreds of other 

 designs, shown in catalogues, but not carried in stock; third, cost of 

 new designs, called for from time to time, similar goods of which may 

 or may not have been produced by others. The quantity in which 

 goods are produced tremendously affects the cost, and the planing mill 

 operator is called upon to supply any of the various classes of goods 

 referred to above in quantities ranging from one to hundreds or more. 

 In this connection will state that at no time has the bureau attempted 

 to establish costs or distribute information bearing on the production 

 of stock goods produced in quantities in stock factories. The purpose 

 of the bureau has been to determine as to the experience of its mem- 

 bers concerning the number of hours worked and the material required 

 to produce any one of the three clas.ses of goods in different quantities, 

 sizes, designs, and in the different kinds of wood, made in the planing 

 mill. The time and material used, as reported by those who have 

 made such articles in the past in the various quantities, is accepted as 

 the best guide from which to base a list and determine the cost made 

 on the various quantities and in the various sizes, and in order thart 

 there might be no suggestion of a sale price, as stated, the list is 

 known as a long list, and contemplates a heavy discount, as in the 

 ca.'se of all stock goods in most all lines of business; and if the depart- 

 ment is under the impression that anything like uniformity of discount 

 prevails, it is suspicion without any basis of fact: furthermore, it must 

 be perfectly obvious to anyone possessing the slightest knowledge of 

 the conditions that a uniform discount or selling price of millwork 

 would be ridiculous and impossible, for the reason that the same list 

 is used throughout the United States and parts of Canada, where a 

 wide range of difference in wage scales and conditions exist, and a 

 still greater difference as to the cost of lumber. Mills situated remote 

 from the source of lumber supply, south, west or north, are paying 

 from 10 per cent to 100 per cent (depending upon the grade and freight 

 paid) more than is paid by competitors situated near the source of 

 supply, so that to urge that a list results in a uniform price, or opera- 

 tion in restraint of trade, is contrary to reason and the facts. If 

 there be any question on this point, a comparison of prices quoted, past 

 or present, will suffice. 



But. it is said that the list might be used as a basis for price agree- 

 ment. So they might, as might any list of stock goods in any line 

 of business. A pencil, a book and piece of paper, desk or anything 

 might be so used. Every conceivable thing might be used illegally, 

 but is there any justification in assuming that someone is guilty of 

 wrong-doing for the simple reason that they have the opportunity to 

 do so? Trade associations which the department approves might do 

 illegal acts, but for that reason are men to be denied the right of 

 constructive co-operation? For the reasons as given, and the fact that 

 it is illegal to fix a selling price, the bureau, while seeking to inform 

 its members as to the experience of others concerning the number of 

 hours worked and material necessary to produce the various designs 

 in the different quantities, based upon the experience of those who 

 have produced like quantities, and designs, has always instructed its 

 members to apply their own cost of lumber, and labor, and overhead, in 

 determining their cost. 



Again, it is urged by the department that some mills might use the 

 list instead of keeping their own costs, which might be true if the 

 list were a selling price. However, the list, as stated, neither suggests 

 a selling price nor overcomes the wide difference in the cost referred 

 to existing in the different localities, which difference no one can 

 ignore, so that the seller, not knowing the discount quoted by his com- 

 petitor, is just as much in the dark as to his ultimate selling price 

 as he would be in the absence of a list. 



Reason Does Not Sustain Daugherty 

 Now, let us analyze the statement in the attorney general's letter, 

 which reads as follows: 



*lt is as clearly a violation of the law to agree upon the cost of an 

 Item that constitutes a part of the total cost price when its cost 

 actually varies, as to agree upon the sale price, because the sale price 

 is substantially affected by such agreement." 



This may be the law, but the conclusion as to the effect is not borne 

 out in fact or reason. The inference is that manufacturers, having 

 knowledge of the cost used by competitors as to any substantial part 

 of the cost, will operate in restraint of trade by influencing the selling 

 price. Let us follow this line of reasoning, and assume that manu- 



facturers of a certain article adopt a uniform basis as to 5 per cent of 

 their cost. The inference is that to that extent they have established 

 a uniform selling price, and by the same token agreement as to 40 

 per cent or 50 per cent of the cost would proportionately fix the selling 

 price. If such is the case, an agreement as to the total cost would 

 absolutely establish a uniform selling price. Assuming that the word 

 "cost " as used in this connection refers to the factory cost or pro- 

 ductive cost, including the factory burden, it would constitute an 

 agreement as to the total of such cost, or cost in the warehouse, not 

 including the cost of merchandising, so that, if knowledge of com- 

 petitors' costs is in restraint of trade, then every wholesaler, jobber 

 and retailer in practically every line of business is now, and has been, 

 operating under a 100 per cent fixed price basis, because it is a fact 

 well known that every wholesaler, jobber and retailer in every line 

 of business is in position to know the exact invoice price paid by their 

 various competitors, as it is the policy of nearly all reputable dealers 

 to avoid discrimination as between customers. In fact, the law pro- 

 hibits such discrimination, and in this state discrimination as between 

 customers is subject to a heavy punishment. Notwithstanding the 

 fact, as stated, that in practically all lines of wholesale, jobbing and 

 retail business, dealers are in position to know competitive costs, the 

 most vicious competition and warfare are frequent, always have been, 

 and always will be, so that, if knowing a competitor's price is in 

 restraint of trade, then the government is the chief offender in pro- 

 hibiting discrimination as between customers. The government, in 

 seeking to establish a uniform price by preventing discrimination as 

 between customers, is supplying the very information concerning com - 

 petitors' costs which, supplied as a result of co-operation, would h, 

 illegal. As a matter of fact, no such fixed selling price has obtained, 

 b^it it serves to bring out the point I wish to make, and that is. in 

 discussing cost, it is essential to decide as to what is included. 



Permit me to consider cost as outlined in Bases 1, 2 and 3. It is my 

 contention that for manufacturers to know their competitors' total 

 factory cost, and for wholesalers, jobbers and retailers to know their 

 competitors' invoice cost, does not operate in restraint of trade in the 

 slightest degree. This is proven beyond a shadow of doubt in the 

 knowledge that wholesalers, jobbers and retailers have concerning 

 their competitors' costs, and there is no claim that such knowledge 

 operates jn restraint of trade. This is perfectly obvious for the reason 

 that cost as outlined in Bases 1. 2 and 3 only includes first costs, to 

 which must be added suflicient to cover the cost of doing business, 

 obsolescence and profit, amounting to from 20 per cent to 100 per cent, 

 depending upon the character of the business. No one knowingly 

 sells below first cost (or replacement value). To do so would involve 

 a loss of from 20 per cent to 50 per cent, so that the most vicious 

 competition would not contemplate a concession in excess of the cost 

 of doing business and profit, which would represent a very heavy loss 

 and would call for investigation by the Federal Trade Commission 

 upon the charge of unfair competition. I have known of thousands of 

 instances where a competitor's prices were known, a reduction was 

 made to secure the business, but few instances where the same or a 

 higher price was quoted. 



Explaining Selling Cost 



Now, then, as to the fourth basis, selling cost, including cost of 

 doing business. While I contend if the selling cost (not selling price, 

 which includes any profit asked) were known, that it would not operate 

 in restraint of trade, for the reason, as stated, concessions are made 

 from profit and not from what is known to be actual cost. However, 

 as stated, cost is what it is. and not a theory or a subject of agree- 

 ment. There is the wide-st possible difference between arriving at a 

 so-called uniform selling cost by agreement and arriving at cost 

 scientifically. T'here is no such animal as a uniform selling cost. The 

 use of a standard cost system contemplates only the application of the 

 same fundamentals in arriving at costs, and so reflects the true cost 

 in every case, which might be similar, but as a rule will show some 

 variation, so that the purpose that can be accomplished in determining 

 probable factory cost in the case of labor and material is to use the 

 past as a guide. 



■While it has no bearing on the activities of the Cost Bureau, I regret 

 to note the attorney general's disapproval of the lumbermen using 

 what might be termed a low uniform basis for stumpage. Replace- 

 ment or market value should be used in figuring cost, and surely 

 stumpage bough ttwenty-flve years ago at perhaps one-tenth of what 

 it is worth at this time should not be considered cost. Supposing the 

 situation were reversed, would the government insist that the sale 

 price of lumber produced from stumpage purchased at a later date 

 be maintained on a competitive basis price with lumber produced from 

 the higher-priced stumpage? 



The attorney general's letter is the first intimation that the dis- 

 tribution of cost information is illegal, and I do not believe he intends 

 this to apply to factory or invoice cost, and any information you can 

 give me on that point will be appreciated. 



During the war the government officials deplored the lack of co-oper- 

 ation in the mill business, particularly as relates to uniform cost 

 accounting, and frequently impressed upon us the necessity of con- 

 structive work growing out of co-operation. When Mr. Hurley was at 



