If sugar costs $1.70/kg, but takes 100kgs of sugarcane and over 2000L of water to produce that 1 kg, how is the end product profitable?
In: 300
A lot of folks gave some awesome answers, but I want to answer in a more general sense because this applies to just about everything:
* `Operating Expense = Cost of Labor + Cost of Input Materials + Cost of Manufacturing`
* `Gross Profit = Income – Operating Expense`
* `Net Profit = Gross Profit – Company Compensation`
In other words any time you make something, make sure you charge more than your operating expenses to have any amount of profit (gross). After that, divy up the profit to paying yourself and staff, then whatever is left is how profitable the business truly is.
You can use this the other way around: If you know it costs $1.70/kg, then the total cost of the 100kg of sugarcane, the 2000L of water, and the price you’re paying for the labor must be less than that. Others have noted that water is essentially free in the areas where it grows. Land to grow the sugarcane was a (legacy) capital expenditure done many years if not generations ago so its cost is equally negligible. It’s getting nutrients from the ground and air, and is self-replicating, so there’s also no cost to growing it. Therefore the cost boils down to the labor and manufacturing expenses. Lets assume manufacturing expenses are free for the sake of argument, then that means farmers are being paid less than $1.70 per 100kg of sugarcane they cut, pack, and ship. How long does it take to do that? Let’s say an hour. *Therefore*, the laborers are making vastly less than what the U.S. considers minimum wage.
Now, there are some challenging assumptions mixed into that analysis, but all key variables are identified. So play with the math, assume that it it somehow profitable, and see what it takes to maximize profit while minimizing operational costs.
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