Ethics, Values and the Family

A market economy in not, as many people think, a selfish society where the rich get richer and the poor get poorer. It is a society with moral values without which it cannot survive.

It stands on the foundation of individual property rights. And it relies to a large degree on people following moral rules, like honesty. Without honesty one simply cannot have fair trade.

In a market economy, the family also plays a very important role. It is the one place in society where sharing is still practiced on a regular and voluntary basis. in a way it is like the small hunting groups of thirty thousand years ago.

It is also the place where one gets the values which make a market economy possible: respect for property, honesty, responsibility, fairness, and compassion.

Adapted from "understading the Economy" by Marc Swanepoel

Learners often have a very scant idea of the principles on which economic systems rest and the so-called left has done a sterling job of making things appear opposite to what they are. For example socialism is seen as the route to go when one has compassion to the poor whilst capitalists are made oute to be greedy and selfish. This while everybody knows that in free market capitalist countries there is less poverty (and even the poor are relatively well off) and the wealthy tend to be very sensitive to the needs of the poor and are therefore philantropic and caring in their actions - the very human qualities that socialist policies tend to blunt (I am not going to care, the state should solve the problem with my taxes - which we know doesn't happen since th burcrats look after themselves and not the populace).

Then we have this whole moral issue of force - free market capitaism is based on voluntary exchange between adult individuals while socialism is dependent on force to expropriate the earnings from the productive groups within society.

The wealthy helping the poor.

The wealthy helping the poor.

I found this article somewhere – I do not know where (but the author's name does appear at the end). I am reproducing it here without explicit permission. It is mainly for the use of my learners at the Branson School for Entrepreneurship.

The wealthy have absolutely no obligation to "help" the poor, assuming that "help" in the context below means the handing over of part of their wealth to the poor without exchange of any comparable value from the poor to the wealthy i.e. economic exchange. The reason is that the wealthy are wealthy due to their past service to society - they have already given, and that is why they have received. Their wealth is the consequence of helping the poor... and middle-class and rich. They offered goods and services and received money in exchange. Voluntarily no less. Let me use an example:

I have a can of cola which I created by digging in the ground under my house for metals, growing sugar cane in my garden and collecting rain water that fell on my property. It cost me some effort and time, but did not take from anyone else to produce. You come along and offer me R5 for the can and I accept. This means that I value my can of cola at less than R5, because I would rather have the R5 than the cola. If I valued the can at more than R5, then I would rather keep the can. Let's say I value it at R4. You obviously value the can at more than R5, otherwise you would rather have kept your R5 - let's say you value it at R6.

Now, after our transaction, you have a can of cola which you value at R6 for which you paid R5 and I have R5 for which you paid for one cola valued at R4. So you and I are both better off than before. I have provided you with the ability to quench your thirst and in exchange you have given me potential to purchase something else to satisfy my needs. We have helped each other.

The problem comes the next day. You drank the drink, but I still have R5. Somehow, it is now assumed that I am rich and you are poor and therefore something is wrong. So would it make it right if I gave you R1 ? That would be the same as selling you the coke at R4 in the first place, in which case I would have gained nothing and you would have gained R2 during the exchange - hardly fair. Giving you more than R1 would make it entirely useless to produce and exchange and neither of us would have anything of value. Giving nothing is neither right nor wrong, since we both gave and received the previous day and are quits.

To summarise, let's invert the example. Let's say you did not drink the coke immediately, but kept it for a few days and I went out, spent my R5 on a loaf of bread and ate the whole thing. Now I have nothing and you have a coke. You are rich and I am poor. Do you have any obligation to share your coke with me ? I really can't see why. And if you did, would you expect me to make and sell you another can tomorrow or to come around asking for another sip ?

Stephen Van Jaarsveldt

Branson stands up for Capitalism

http://www.dailymail.co.uk/news/article-1061463/In-defence-capitalism-Richard-Branson-argues-free-markets-enrich-gives-tips-YOU-success.html

What other say of CIDA

http://dummyspit.wordpress.com/2008/09/26/cida-%E2%80%93-education-for-young-africans/

Costing! an explanation of Breakeven.

Costing

Costing

For an entrepreneur to know the cost of a product or service is of utmost importance since the cost plays an important role in pricing the product or service for resale. One would under normal circumstances never price a product under its cost.

Cost however is not that easy to determine since there are different types of cost. The first kind of cost is the direct cost. If you purchase a box of items for R 100 for 10, one can say that the direct cost is R 10 per item. But if you had to take a taxi to the shop and you had to pay R 10 in total for this, one needs to add this indirect cost to the cost of the item and in this case it will work out at R 1 per item, which will bring your total cost to R 110 or R 11 per item. If you then had a salesperson that you will be paying R 2 per item (this is also a direct cost since each expenditure is directly related to the sale of an item) then your total cost will be R 13 per item.

If you sell each item for R 17 each, how many items will you have to sell to break even?
One can tabulate it as follows:
EXAMPLE to calculate your breakeven selling volume


Items sold XXX 1____ 2_____ 3
Cost price R10 R20 R 30
Commission
(variable cost) R 2 R 4 R 6
Transport
(fixed cost) R10 R10 R 10
TOTAL R 22 R 34 R 46
Sales R 17 R 34 R 51
Profit/loss - R5 R 0 R 5





Here is a rough drawing of the relationship.


Sales

Profit region

Breakeven point Total cost


Variable cost
51

46



34

22

17

10 Fixed cost





Loss region


Formula to calculate breakeven point:

Breakeven Point = fixed costs / contribution margin.

Breakeven point definition and explanation:
The breakeven point is the point at which a business breaks even (incurs neither a profit nor a loss)

The breakeven point is the minimum amount of sales required to make a profit.

Where there is a linear relationship between variables (Total Cost, Sales, Variable cost) the break-even point in terms of Unit Sales (x) can be directly computed. We know that the break even point is where Total Revenue (TR) equals Total Costs (TC) :

TR = TC

Total Revenue is the Price multiplied by the volume sold (P x x), which is unknown.(the break even volume). Where that is equal to TC is our volume breakeven point.

P x x = TC

Total Cost (TC) for a given volume (number of products produced or sold) is made up of two elements – Total Fixed Cost plus Variable cost times the volume. TFC + V x x

Therefore to find the value of x, we now have

P x x = TFC + V x x
P x x - V x x = TFC
(P-V) x x = TFC

Therefore x, the breakeven is

x = TFC
P - V
where:

TFC is Total Fixed Costs,
P is Unit Sale Price, and
V is Unit Variable Cost.

The Break-Even Point can alternatively be computed as the point where Contribution equals Fixed Costs. The quantity is of interest in its own right, and is called the Unit Contribution Margin (C): it is the marginal profit per unit, or alternatively the portion of each sale that contributes to Fixed Costs. Thus the break-even point can be more simply computed as the point where Total Contribution = Total Fixed Cost:


Summary

The break-even point for a product is the point where total revenue received equals the total costs associated with the sale of the product (TR=TC). A break-even point is typically calculated in order for businesses to determine if it would be profitable to sell a proposed product.

You need to be able to explain Break-even – this means that you need to:

a. Know the break-even graph. You might have a graph and be asked to identify the points
b. Know how to calculate contribution margin (CM) and its importance. Remember
CM = Sales Price – Variable Cost
c. Know how to calculate the contribution margin ratio. The formula is CM Ratio = Contribution Margin / Sales Price.
d. Know how calculate break-even in units. The formula to calculate breakeven in units is: BE in units = FC / Contribution Margin.
e. Know how to calculate units needed to achieve target profit. The formula is Target Profit in Units = (Fixed Costs + Target Profit) / Contribution Margin.

Another example

If the product can be sold in a larger quantity than occurs at the break even point, then the firm will make a profit; below this point, a loss. Break-even quantity is calculated by:


Total fixed costs / (selling price - average variable costs).
Explanation - in the denominator, "price minus average variable cost" is the variable profit per unit, or contribution margin of each unit that is sold.
This relationship is derived from the profit equation: Profit = Revenues - Costs where Revenues = (selling price * quantity of product) and Costs = (average variable costs * quantity) + total fixed costs.
Therefore, Profit = (selling price*quantity)-(average variable costs*quantity + total fixed costs).
Solving for Quantity of product at the breakeven point when Profit equals zero, the quantity of product at breakeven is Total fixed costs / (selling price - average variable costs).
Firms may still decide not to sell low-profit products, for example those not fitting well into their sales mix. Firms may also sell products that lose money - as a loss leader, to offer a complete line of products, etc. But if a product does not break even, or a potential product looks like it clearly will not sell better than the break even point, then the firm will not sell, or will stop selling, that product.

An example:

Assume we are selling a product for R2 each.
Assume that the variable cost associated with producing and selling the product is 60 cents.
Assume that the total fixed cost related to the product (the basic costs that are incurred in operating the business even if no product is produced) is R1000.
In this example, the firm would have to sell (1000/(2.00 - 0.60) = 715) 715 units to break even.

Break Even =TFC / (SP − VC)

where TFC is Total Fixed Cost, SP is Selling Price (per unit) and VC is Variable Cost (per unit).


EXAMPLE to calculate your breakeven selling price


Given the formula to calculate breakeven selling price:

BE selling price = profit +[(variable cost per unit x Quantity produced) + Total Fixed Cost]/Quantity Produced

Variable costs are items such as: direct labor and direct materials

Fixed costs are expenses such: marketing/advertising and indirect labour (salaries)

So, say you make 100 items.

Some cost figures are:

MATERIALS

100 blank cd's = R 400 (price for all)

100 CD Cases = R 300

100 cd labels = R 200

Ink cartridge = R200

or 1100/100 = R11,00 per unit

LABOR
how much would you pay yourself? Well, we'll say it's free.

OVERHEAD
you pay the rent, utilities so it's free

FIXED COST

R 1000 for marketing and advertising (surveys and ads and whatever else to start off)

ok, let's do the calculation:

BE selling price = (R0 + 1100 + 1000)/100
That equates to R 21,00 per unit given sales of 100 units.



Now, what do u want your profit TO BE????

Say you wish to make R 5000 off 100 cd's, then:

Selling price = (5000 + 1100 +1000)/100 = R 71,00 per cd.




Charl Heydenrych
18 September 2008

Start you own business.

Do you wish to start a business of your own in South Africa. Talk to me about a one-year systematic planning process that will launch your new business in a planned and sensible way.

Contact me at: charlheydenrych@yahoo.com

A part of the costing Unit Standard - Not yet competent

We will be uploading the "competent" video shortly. This level of performance has been attained totally through self-learning with very little (in fact no) instructor support other than having a copy of the Unit Standard assessment checklist, a worksheet and access to the internet.

This was part of the first formative assessment interaction.