Thrawn Rickle 30

Forest Service Pricing

© 1993 Williscroft

We have already examined Randal O’Toole’s criticisms of Forest Service cost accounting. In his book, Reforming the Forest Service, published by Island Press, he also examines several other aspects of Forest Service operations. How the Forest Service determines prices is especially interesting.

To illustrate the process, O’Toole creates a conversation between an imaginary former chief of the Forest Service and the Chrysler governing board.

“Chrysler should sell its cars at weekly auctions held by dealers,” proposes the chief.

“What if the auction prices are really low?”

“That’s the advantage of this system,” answers the chief. “Since most cars will be sold for some price, Chrysler won’t have to worry about which car people really prefer. Of course, we will set a minimum price of $100 over the cost of transporting a replacement car to the dealer.”

“That could be pretty low,” comments Iacocca.

“Yes, but since the replacement car probably will sell, it may bring a higher price. If the first car were not sold, then there would be no opportunity to get this higher price.”

“What about trucks?” Iacocca asks.

“We’ll use a special Forest Service formula.” answers the chief. “Subtract the truck operating cost from its estimated value to an average owner to obtain the residual price. We can easily outsell GMC this way.”

“But will Chrysler earn money?”

“I ran the numbers through the Forest Service computer. Plymouth and Dodge will lose money, but luxury Chryslers will recoup the loss.”

“Why don’t we just sell those, then?”

“Americans purchased ten million cars last year,” argues the chief. “Forest Service studies show that they will agree to pay five percent more each year for the next ten years. Since the other manufacturers aren’t gearing up for this increase, Chrysler can take advantage of it. It’s important to us that all these cars be locally produced”

“It appears that the cost of the new factories you are proposing are not included in your cost-benefit analysis,” observes Iacocca.

“Of course not,” answers the Chief. “We’ll pay for most of those from last year’s profits. The balance we’ll amortize over fifty years because we can assume they will eventually be paid off by sale of cars.”

“To sum up, then,” says Iacocca, “we will lose money on most of the cars we sell, but overall we will be profitable—if we don’t count capital costs.”

“Exactly—just like the Forest Service has operated for forty years.”

Forest Service timber is sold at competitive auctions—proving its “fair market value,” according to the Forest Service. Yet, O’Toole writes that it establishes a minimum bid that is often just 50¢ per thousand board feet plus the reforestation cost. The Forest Service justifies resulting loses, he writes, by claiming that they will be recouped from future sales of the reforested timber.

The minimum bid price for other sales—the residual price—is the value of the timber to the purchaser less the cost of logging and manufacture. O’Toole points out that this is frequently less than the cost of sales, especially outside the Pacific Northwest, which the Forest Service says is more than made up for by Pacific Northwest sales.

An old axiom says you can prove anything with numbers. It’s a good thing the Forest Service has Congress for a banker.