The light in the room was a blinding white. It took a minute for her to recognize that it was her own room. She closed her eyes and lay back in bed. She had no recollection of getting home, none whatsoever. She did have a vivid recollection of a horrible dream. Looking at the clock, she saw that it was already early afternoon, and she scrambled out of bed and got dressed.

The city outside was like an oven. She hurried from her building toward Broadway, and saw that outside the building which housed The Split and Cafe of the MoMent, police had set up some barricades. The awning of the place was being torn down.

"What happened?" she asked someone.

"Hey! It’s her! The miracle woman!" shouted the man. Before she knew what was happening she was surrounded by a crowd of eager onlookers. Someone thrust a paper in her hand, and there she was, on the front page -- lying sprawled on the street beneath a canopy.

"IT’S A MIRACLE!" screamed the New York Journal headline. And in smaller type, just below: "Girl walks away from deadly fall!"

She stared at the paper, all right, but she stared at the person in the photo as it if were a total stranger. The photo matched perfectly her dream of the night before.

The man at her side touched her elbow.

"Whatever you’ve got in you, I want some," he said.

* * *

That night at the New Amsterdam theater, her friends in the cast could not quite believe that she had survived the fall. Neither could she. Lorelei Jamison, the prop girl, only confused her further when she said, "Diane! Who was that looker with you on the Circle Line tour this afternoon? Looked to me like Don Juan did a Lazarus! How'd you snag him, and how about divvying up the booty?" Diane had not been on any Circle Line tour, and had no idea what Lorelei was talking about.

The play's set was a modern factory: assembly lines, spiral stairs leading to catwalks high above the shop floor, and lots of skimpily clad dancers handling exotic car parts. Diane’s role was the lead. Her boyfriend in the show was a worker on the assembly line who mistreated her. Meanwhile, she and the owner of the factory fall in love. She carried the show, and the hearts and dreams of the audience, through the following scenes:

1. Her boyfriend is fired and gets his severance check. He leaves and vows revenge.

(A short time later, the factory burns to the ground)

2. Standing on a pile of smoldering ashes, the owner receives a huge check from an insurance adjuster. The owner and Diane kiss atop the ashes, and swear they’ll rebuild the place.

3. A wagon full of ivory steering wheels is carted off and thrown out because it doesn’t fit with the current steering-wheel fashion craze. The owner sadly shakes his head.

4. The owner of the factory hands a suitcase full of money to a banker, who’s delighted because the loan is being repaid ahead of time. They shake hands vigorously.

In the course of the plot, the owner tries to persuade others to invest in his company. He’s an honest man, but he can’t persuade people to invest because the business doesn’t look profitable enough and the stock is in the dumps. (Sure, potential investors understood that the fire was a one-time event and that he could resurrect the auto parts business. But they pointed to his profit margins, particularly the gross margin in the latest fiscal year. Invariably, they would compare it to other auto parts companies and say "I think I can do better elsewhere.") He ends by tragically killing himself, tormented over the dream that he has been unable to recreate for his beloved. She in turn casts herself into the machinery of the factory, to be joined with him in death.

The business did not look profitable enough because the cost of goods sold was too high. Which of the following is a one-time charge which would increase the cost of goods sold?

1) Severance costs (the boyfriend receiving his paycheck)

2) The insurance settlement (the check changing hands on the smoldering ashes)

3) Inventory write-down (the steering wheels being carted off)

4) Debt pre-payment (the banker’s early payment)

Enter your selection in the field to the lower right, and get immediate feedback on the answer!

The answer is 3) Write-downs for obsolete inventory flows through cost of goods sold.

If cost of goods sold is high, then by definition gross profit declines (gross profit equals revenues minus cost of goods sold). If the company can't charge a reasonable mark-up on its inventory, it's going to have a tough time covering overhead, sales and marketing expenses, general and administrative expenses, and possibly interest expenses.

But as all Foolish investors know, one should look past one-time charges in looking at the profitability of prospective investments -- as long as the company in question doesn't habitually show large "one-time" charges for obsolete inventory and restructurings. In the case of this business, when these write-offs aren't habitual, one should look at the cost of goods sold before the inventory write-down and compare it with other companies in the industry and with the company's historical gross margin. Having done that, the investor is better prepared to decide upon the valuation of the business.

The audience gave her an ovation at the end, applauding as much for her miraculous survival as for her performance, she felt sure. She also felt sure that something was very wrong.

The man sitting in row M, seat 23, was not applauding. He was staring at her. She had no way of knowing that he had attended every single performance she'd given for the past 117 days. Or that he had paid off every usher, stage hand, and theater employee to keep quiet both the fact that he sat in the same seat every night, and his true identity. Or that he was at that moment arranging to have his expensive car pick her up at the stage door, whether she liked it or not.

Tomorrow: The Roaring 20s, Episode 4:
In The Belly of the Beast

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