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The ‘Cost Per’ Calculation Can Save You Money

by The Happy Rock on November 4, 2007

dresser-bedroom-wood.jpgSometimes changing the criteria by which we assess the cast of a purchase can save us a lot of money. I like to use the trick of calculating the ‘Cost Per’ to see how much something will really cost. My favorite calculations are usually cost per use and cost per year, but the calculations can be modified to evaluate any type of purchase. $12 dollars per bottle of vitamins or 8 cents a capsule? $100 a year for the HashiTashi brand TV, or $50 a year for a Sony that lasts 10 years?

Let’s closely examine how we would use cost per year to evaluate the better buy on a new bedroom set. One bedroom set can be bought at IKEA for about $1200, while a second set costs $4,000 dollars at a high end furniture store. You like both sets equally, how do you decide which to buy?

On the surface the $1200 looks like a much better deal. We might arrive at a different conclusion if figure out cost per year. The $1200 set will last about ten years if you are lucky, for a cost of $120 per year. The $3,800 has the potential to last 40 years and be passed on to your children or friends, for a cost of $95 dollars a year. Now the more expensive outlay doesn’t hurt near as much.

Now the final deciding factors will probably need to account for many other factors too. Do you like to change you room designs often? Do you like to have heirlooms to pass down to your children? Do you take good care of your stuff? Don’t have the cash? All these types of questions will also factor into your decision too? After all, that is why finance is personal.

The main point is that sometimes changing the perspective through which we view purchases can often change how we feel about spending the money. Using the ‘Cost Per’ calculation is a great way to gain some new perspective. This new perspective can often lead to gems like “buying the cheaper item doesn’t always save you money”. When you factor in the need replace the item more frequently and the hassle of dealing with an inferior product, the cheaper item costs more.

{ 4 comments… read them below or add one }

poetloverrebelspy November 6, 2007 at 7:36 am

Greetings! Linked over from this week’s Festival of Frugality.

If you move all the time, cost-per calculations for furniture probably aren’t the best decision-making mechanism. Essential factors would instead be resale value (what is the likelihood you get anyone to pay near the cost of the expensive bedroom set when they’re buying used?), weight, and ease of (de)construction/transport.

Also, a lot of cheap items last for decades too, and the most frugal among us find novel uses for “retired” items that decreases their cost-per ratio. Sadly, a brand-name is no longer a guarantee that a product will last for a certain amount of time — we call that a warranty, and you’ll notice very few products — even brand names — guarantee more than ONE YEAR anymore.

Once again, if your life is more temporary than the one implied here (meaning both that there are an uncertain number of years/uses to divide by and that you will likely part with the item before the end of its life), you are unlikely to recoup the investment in a more expensive item.

It seems to me the moral of the story here is buy used, inherit unwanted items from others, or freecycle. This results in the lowest cost-per ratio of all!

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Mike November 6, 2007 at 4:44 pm

When you get into weighing things 10 years out or 40 years out, I think it’s appropriate to ponder the time value of money. If you buy something that’ll last for 40 years instead of 10, would you have done better to invest the $2600 and used the returns to buy something in 10 years (then you’ll have $6155 if you get 9% per year, not unreasonable for the stock market)?

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TheHappyRock November 7, 2007 at 2:29 pm

@poetloverrebelspy – Those are some other good factors to consider, as I said the choice is very personal. With regards to warranties, I don’t think they are useful in telling which item is the best, usually user reviews and history are better predictors. I would rather have a solid item without a warranty than a junky item with one. And I do agree that buying used is great or recycling is wonderful.

@Mike – I hope that people don’t to hung up on the exact example, since it was simply meant to be a simple clear illustration of the ‘Cost Per’ calculation rather than a perfect example. With that said, I think it is a great point to think about investing the difference. We would also need to factor in taxes and inflation too which probably negates a lot of the gains, but it is definitely worth thinking about.

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JohannaB December 7, 2007 at 7:30 pm

thanks for the post. I’ve been using cost per serving when it comes to food but never thought of following through on cost per use.

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