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The Cost of Doing Business Fixed vs. Variable Expenses. 4 Types of Businesses. Manufacturer. Wholesaler. Retailer. Service. Creates products with raw materials Sells in bulk to wholesalers. Buys products in bulk from manufacturers Sells in smaller bundles to retailers.
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4 Types of Businesses Manufacturer Wholesaler Retailer Service • Creates products with raw materials • Sells in bulk to wholesalers • Buys products in bulk from manufacturers • Sells in smaller bundles to • retailers • Buys smaller bundles from wholesalers • sells single items to consumers • Offers a unique set of skills or expertise at a fee
4 Types of Businesses: Defining the Unit of Sale – Example Manufacturer Wholesaler Retailer Service • Sells in bulk to wholesalers • 1 Unit = • 1,000 t-shirts • sells single items to consumers • 1 Unit = • 1 t-shirt • Offers a unique set of skills or expertise at a fee • 1 Unit = • 4 hours of babysitting service • Sells in smaller bundles to • Retailers • 1 Unit = • 12 t-shirts
Fixed Stay constant regardless of sales USAIIRD Variable Change with each unit of sale Total Variable Costs* Cost of goods sold Other variable costs Commission Shipping Packaging Spoilage Expenses * Also called Cost of Sales
Fixed Expenses to Operate Business Interest Salaries Advertising Insurance Depreciation Utilities Rent OtherEXpense
Fixed Expenses • Focus on fixed expenses • USAIIRD ISAIDUROX • Depreciation - use straight line calculation • Other Costs • Transportation, Supplies, Maintenance • Professional Development, Education
Labor Expense • Labor Expense per unit differs from salary
Lego Activity Objectives NFTE’s Objectives: • Introduce students to classifying costs • Engage students in fun Economics of One Unit exercise
Lego Activity • In groups, create a toy made by Lego • Survey Lego available in market • Determine target consumer • Design and name the toy • Assemble toy • Determine: • Material cost • Labor cost • Variable cost • Fill out the simple worksheet
Lego Activity • Present back: • The Name of the toy • Target consumer • Your worksheet
Lego Activity Debrief • What did you think about the activity? • As a Student? • As a Teacher? • What was the purpose/objective? • How would this work in your classroom? • Any Modifications?
Formula: Contribution Margin = Selling Price – Var. Exp. per unit per unit per unit Economics of 1 Unit (COGS/ + other var. Expense) per unit per unit Also called “Cost of Sales/unit”
4 Types of Businesses: Defining the Unit of Sale – A T-shirt Business When calculating Economics of 1 Unit, it’s important to define our Unit of Sale Manufacturer Wholesaler Retailer Service • Sells in bulk to wholesalers • 1 Unit = • 1,000 t-shirts • sells single items to consumers • 1 Unit = • 1 t-shirt • Offers a unique set of skills or expertise at a fee • 1 Unit = • 4 hour hiking trip • Sells in smaller bundles to • Retailers • 1 Unit = • 12 t-shirts
Economics of 1 UnitCustomized Gift Basket • Things to consider: • Direct labor • How long does it take to assemble one basket? • Customization • What is the average cost per unit? Find the range • How much customization is affordable? • Multiple economics of 1 unit • How many economics of 1 unit should there be?
Economics of 1 UnitCustomized Gift Basket • Calculate economics of 1 unit: • Materials • 10 Baskets = $10 • Ribbons and cellophane wrap for 10 baskets= $20.00 • Items for 10 baskets = $170.00 • Labor per hour = $6.00 • 15 minutes to assemble • Commission = 10% of sale
Economics of 1 Unit • What is the unit of sale for our gift basket? • What is our Contribution Margin per Unit?
COGS: Turkey Sandwich Exercise ItemAnalysis Cost/Sandwich Turkey (4 oz.) ($2.60 per lb.)/4 $0.65 Bread (Large Roll) ($1.92 per dozen)/12 $0.16 Mayonnaise (1 oz.) ($1.60 per 32 oz. Jar)/32 $0.05 Lettuce (1 oz.) ($0.80 per lb.)/16 $0.05 Tomato (1/4) ($1.12 per tomato)/4 $0.28 Pickle (1/4) ($0.20 per pickle)/4 $0.05 Wrapper ($10.00 per 1000)/1000 $0.01 Labor per unit: $7.00/ hour How long to make one unit: .1 hours (<5 minutes) Labor per unit: $.70 Cost of Goods Sold per Unit $1.95
Total Sales for One Month Market analysis • Assume school of 500 students • How many buy lunch? • How many bring lunch? • How many complain about quality of cafeteria food? • How many participate in after school activities? • How many selling days in one month? • How many sandwiches can I make per day? • How many sandwiches can I sell per day?
Example:Economics of 1 Unit Lawn care Service
Economics of 1 UnitLawn care Service Things to consider: Average Unit What is the average size of a lawn? What services will you provide the lawn? Labor Cost How do you value your labor per hour? How many hours of labor will you need to provide? Supply cost What materials will you need to provide? What is the average amount of materials used on one lawn?
Economics of 1 UnitLawn care Service Calculate economics of 1 unit Average size lawn takes 2 hours Labor cost per hour = $7.50 Supply Cost 3 lawn bags for 1 hour work 5.99 for 100 heavy duty bags 1/4 gallon of gas per 1/2 acre lawn
Sales Assumptions • What are the assumptions that inform your projections? • Size of market (Target Market) • Full capacity • How much time can you spend (see time management slide)? • Do you have help? • Seasonality • When is the busiest time of year for you, your industry? • Time to develop a brand presence and establish customer base (ie. No business sells at full capacity immediately)
Time Management Lawn Care Business 13
Monthly Sales Projections Lawn Care Business Break-Even Units Total Units Full Capacity
Final Financial Thoughts Guide Students to the lowest unit Makes it easier to project costs and describe business Have students map out the entire business process before even looking at any numbers Play with numbers in Excel Remember Financials are fun and tell the businesses story!
