CHAPTER Section 10.1 The Cost of Doing Business Section 10.2 The Economics of One Unit of Sale Business Decisions & the Economics of One Unit

SECTION OBJECTIVES Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Define and provide examples of fixed expenses Explain how variable expenses are calculated Define economies of scale The Cost of Doing Business 2

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Fixed Expenses An easy way to remember eight of the most common fixed expenses is to remember the phrase: I SAID U +Other FXs 3 Insurance Salaries Advertising Interest Depreciation Utilities (Gas, Electric, Telephone) Rent Other Fixed Expenses Insurance Salaries Advertising Interest Depreciation Utilities (Gas, Electric, Telephone) Rent Other Fixed Expenses

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Variable Expenses The two types of variable expenses are: Cost of Goods Sold (COGS). For manufacturing and merchandising (retailing and wholesaling) businesses, the variable expense that is associated with each unit of sale is called the cost of goods sold. Other Variable Expenses. These can include such expenses as commissions for salespeople, shipping and handling charges, or packaging. 4

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Depreciation To caclulate the annual depreciation expense, you can use the formula shown in the following example. 5 = ÷ –= –= ÷ = Cost

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Economies of Scale The most common ways to gain an economy of scale are: Spreading fixed costs over as much output as possible. Typically, as your fixed costs per unit decrease, your profit increases. Getting better deals from suppliers. You can get discounts from suppliers if you buy in quantity (volume discounts). Typically, as your cost of goods sold per unit decreases, your profit increases. 6

SECTION OBJECTIVES Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. Define a unit of sale Explain how to calculate the economics of one unit of sale The Economics of One Unit of Sale 7

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. What Is a Unit of Sale? The unit of sale is the basic building block of your business. 8

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. The Economics of One Unit of Sale To calculate the economics of one unit of sale, subtract the variable expenses for a unit from the unit’s selling price. The result is the contribution margin. This is the amount per unit that a product contributes toward the company’s profitability before the fixed expenses are subtracted. 9

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. EOU for a Manufacturing Business 10

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. EOU for a Wholesale Business 11

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. EOU for a Retail Business 12

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. EOU for a Business Selling More Than One Product 13

Entrepreneurship: Owning Your Future, 11 th ed. Steve Mariotti © 2010 Pearson Higher Education, Upper Saddle River, NJ All Rights Reserved. EOU for a Service Business 14