Help me understand the percentage of profit on this transaction:
Your next door neighbor has 4 truckloads of dirt on his land he wants hauled off. He spots you in the driveway and asks if you can help. You agree to take care of it by tomorrow if he pays you $50 per load. He agrees and pays you in advance. You walk back inside your house where your old buddy is sitting quietly at the kitchen table. Your old buddy lives next door to a guy who owns a dump truck and a front end loader and is desperate for 4 loads of dirt. He needs it to finish a multi-million dollar contract. So that night when Old Buddy gets home he calls over the fence to his dirt-desperate neighbor and tells him to get his dump truck and front end loader and stop by your house the next day. The next day, he shows up and you tell him you'll sell him the dirt sitting next door for $200 per load. He pays you, loads it up, and he's gone.
You now have $1000 in your pocket. You paid nothing for the dirt; in fact you were paid to own it. You spent absolutely nothing to complete the transaction needed to sell it.
So what is the percentage of profit? If you had been given the dirt for free it would be 100% profit - so the profit must be higher than 100% since you were paid to own it.
This illustrates why profit as a percentage of sale price is flawed denominator.
Last edited by GregSY; 02/10/08 12:34 AM.
