From: ssi!lfa@uunet.UU.NET ("Louis F. Adornato")
Newsgroups: sci.space
Subject: Re: Stupid Shut Cost arguements
Date: 28 Dec 92 16:42:49 GMT
Distribution: sci
Organization: [via International Space University]
X-Added: Forwarded by Space Digest
Original-Sender: isu@VACATION.VENARI.CS.CMU.EDU

"Allen W. Sherzer" <aws@iti.org> writes:

>In article <1992Dec25.014627.4982@ke4zv.uucp> gary@ke4zv.UUCP (Gary Coffman) wri
>tes:
>
>>In military procurement, the development costs are charged against
>>the prototypes, X, Y, etc, and the operational vehicles of the procurement
>>are charged at "flyaway" cost.
>
>Which I suspect is done largely to hide the true cost. I point out that if
>the contractors in question ran their accounts this way they would all be
>in jail and out of buisness.

Wrong.  Many major corporations consider research and/or development a
"sunk" cost - it's something that's considered part of the cost of
staying in business, and, since it's paid for in cash that's generated
by the current product line, it doesn't _have_ to be amortized against
the new product lines, and so it isn't.  This allows much more
flexibility in developing a pricing strategy for the new line.  The
only concern in this case is the rate of return on investment and 
the total return on investment (one is the derivative of the profits to
be generated by the new product line, the other is the integral of 
profits over the life of the product line).

Of course, a start up business, with no existing product line and no
cash flow, has to borrow money to cover initial R&D, and that borrowed
money has to be paid back over the life of the loan, therefore the R&D
cost has to be amortized against the cost of the (eventual) product.
ROI and rate of RIO are still important (if the ROI is less than your
startup financing, or if the rate is less than the maturation rate
of your financing, you're in BIG trouble).

>
>>Following this model, Enterprise ate the
>>development costs, and it's retired. Current Orbiters are only liable for
>>their $1.5 billion flyaway cost and their operational costs.
>
>But why should we follow that model?

Because NASA paid for the design and development work (and precious
little research) up front, and doesn't have to pay anyone back for
those costs.  The fact that the Federal government itself borrowed that
money doesn't enter into it, it's still a sunk cost paid out of current
funds. 

>                                     Hiding costs like you advocate only
>encourages waste and inefficiency.

On the contrary, by keeping development and operational costs separate,
there's less opportunity for waste and inefficency in one phase to get
buried in the lifecycle costs.  Besides, development and operations are
two completely different kinds of costs, so drawing a clean line
between the two also provides better historical information for
budgeting, forecasting, and cost control on the next project.

>                                    How can we possibly make access to space
>cheap if we make it impossible to identify those costs and reduce them?

How do you figure that limiting design and development costs to the
prototype makes it impossible to identify them?  Seems to me that it's
the other way around; the amortization you propose leads to much more
blurring of where the real costs where incurred.  Attempting to
amortize a sunk cost artificially inflates the per-flight cost, and
will also probably swamp out many meaningful variations

Of course, amortizing the development costs does have one real
advantage; it ensures that the shuttle's per-flight costs will always
be astronomical, while allowing the DC program to hide it's own
development costs behind a vaporware figure of useful lifespan.  I
think this is not only unethical and deceptive, it's also unnecessary
and self-defeating.  Developing a new spacecraft is expensive,
especially when you want to design it for a long and cost-effective
life, and we shouldn't try to hide this.  We're not going to do anyone
any favors by selling the American public on another grandiose
"space-truck" that can't live up to inflated expectations (I once saw a
1974 vintage (awful) movie that had Columbia flying _three times_ in
one day).

Lou Adornato                 |    "Sure, the cow may have jumped over the
Supercomputer Systems, Inc   |      moon, but she burned up on reentry"
Eau Claire, WI               | The secretary (and the rest of the company)
uunet!ssi!lfa or lfa@ssi.com | have disavowed any knowledge of my actions.