Whats with "Cut Outs"

As was explained to me:

The record companies produced more than could realistically be sold of that particular LP. So to get them into the pipeline, they sold/pushed them on many outlets at greatly reduced fees. But just in case any of that record was returned for credit, it was a means for the record company to be sure they returned the right amount to the outlet, and not more.

Lets say that a record was normally sold to an outlet for $5.00, which then sold it to us for $7.00. Now if this LP wasn't selling, the record company would sell/push it for $1.00 (with the cutout) to get it into the pipeline, hoping that more would sell, and they would get stuck with less. Now if it didnt sell, the outlet couldnt return it to the record company, claiming that they paid $5.00 for it, when in fact they had only paid $1.00. A deterant for fraud, if you will.

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I believe that the music stores were not allowed (by the record companies) to cut the price of regular albums beyond a certain point, unless that album (or cover) had been damaged. Therefore, to get rid of albums that had been sitting too long, they would damage the album themselves.
Usually this involved cutting the album cover, or drilling a hole through it, or some other procedure. The album themselves are usually not damaged. I have bought many a "cutout" album to save money. (Resale value of cutouts are much lower, since the cover is no longer in decent condition. But who cares if you bought to album to listen to, rather than to collect.)

This is what was told to me by various record store owners anyway.