Last night, President Obama showed his ignorance of economics and business with the following statement about his health care plan:
â€œBut by avoiding some of the overhead that gets eaten up at private companies by profits, excessive administrative costs and executive salaries, it could provide a good deal for consumers.â€
As many Twitterers and bloggers immediately pointed out, profit is not part of overhead. Profit is what’s left after overhead and other costs are subtracted from revenue. To increase profits, one reduces overhead. How does one get through Columbia and Harvard and still have such ignorance about economics and business?
Before his next speech, as a favor to our president and his TelePrompter, I offer this primer:
1. Calculate the total of all your sales for a specific period such as a month or a calendar quarter by adding the sales together. If you sell the same item at different prices, total each price point separately.
2. Figure your cost of sales by adding the cost of all materials and labor. If you want a profit figure for accounting or tax purposes also add your overhead to this sum. Your overhead consists of such items as utilities, leases, office supplies and entertainment costs.
3. Subtract the cost of sales (price of material and labor) from the sales total to determine your total profit. If you want to calculate your profit per item just divide the total profit by the number of items sold.
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