Are Consumer Prices of Gatorade and Bottled Water Exorbitant Compared to Gasoline?

A friend sent me a widely circulating e-mail indicating that in spite of the rapid jump in gasoline prices, it is relatively cheap on a per gallon basis as compared to other liquids on the market, such as Pepto-Bismol, Gatorade, bottled water, and printer inks. The implication is that consumers are being ripped off by suppliers of these other liquids.

My response in explanation is as follows:

Partially true but an exaggeration.

All the comparisons have low-volume, special packaging, and in many cases higher-priced ingredients. Total administrative costs may be the same or higher, because of different sales outlets. Specialty products also require significant advertising.

In the calculation of profit, one starts with manufacturing cost, which includes raw materials, labor, packaging, plant amortization, utilities, and any other costs connected with the manufacturing operation. Add to that, the Sales and Administrative costs, which include salaries, benefits, advertising, and any other sales expenses. That's the gross product cost. Subtract it from the sales revenue to get gross profit. Subtract taxes to obtain net profit. Divide net profit by sales revenue to obtain percent profit. That's all on total production of that particular product. Using total number of units or pounds produced, one can calculate manufacturing cost per unit, S&A per unit, etc.

Most of the comparative sale prices per unit are not out of line from a profit point of view. An exception may be water, which is why so many different brands are available. Products are generally sold on a "what the market will bear" price. Apparently, those people who purchase bottled water do so for a variety of reasons, which may include status of the buyer, unsubstantiated fear of city water, better taste, or convenience of the bottle in daily activities.

With respect to printer ink, I tend to agree that printer manufacturers probably sell their printers at low prices, to be able to lock in future sales of high-priced printer cartridges. However, this also creates a profit opportunity for independent cartridge refillers, such as Office Max. Even with reduced prices, Office Max probably makes a substantial profit on that business. With a free market system, other potential refillers can also enter the market, which would bring down the price. I've seen several entrepreneurs try to do this and have gone out of business. This likely happened because of insufficient business volume. In other words, the "bearing market" seems satisfied with purchasing new printer cartridges from the original printer manufacturer rather than taking a quality risk from an unrecognized supplier.

Finally, gasoline is relatively cheap per gallon, because of the tremendous volume sold. This brings down manufacturing cost and S&A per gallon to rather low percentages. Profit potential is high so that government can tack on special taxes, in addition to corporate income tax and still make the product seem cheap on a per gallon basis.