MODULE 12.2 COST STRUCTURE

COSTS QUICK TIP: YOU MUST FIRST UNDERSTAND YOUR OWN COSTS BEFORE YOU CAN DETERMINE THE PRICE YOU CHARGE YOUR CUSTOMER We are going to talk about all the costs that go into starting your venture and operating that venture. Quick tip- You must first understand your costs before you can determine the price you charge your customers

COST BRAINSTORM WHEN YOU BUY A PINT OF ICE CREAM, WHAT ARE YOU REALLY PAYING FOR? Cost Brainstorm- When you buy a pint of ice cream, what is it that you are really paying for? Enable student to brainstorm ALL of the costs that go into making a pint of ice cream.

COST BRAINSTORM: BEN & JERRY’S What are the costs involved in making a pint of ice cream? + Milk + Sugar + Chocolate + Cardboard pint container + Delivery Truck + Ice cream making machine + Ice cream packaging machine + Ice cream label making machine + Rent at the factory + Salaries at the factory Encourage students to brainstorm ALL of the costs that go into making a pint of ice cream: +Milk +Sugar +Chocolate +Cardboard pint container +Delivery truck +Ice cream making machine +Ice cream packaging machine +Ice cream label making machine +Rent at the factory +Salaries at the factory

COST CATEGORIES

COST BREAKDOWN: TWO MAIN CATEGORIES When looking at costs, there are two main categories: CapEx: Capital Expenses OpEx: Operating Expenses What do you think these mean? There are 2 main categories for costs: CapEx & OpEx. Give students the chance to brainstorm what the meaning of these terms before sharing the definitions.

COST BREAKDOWN: CAPEX CapEx (AKA: Capital Expenses). Think of CapEx as the BIG physical items that you buy one time and use frequently. Usually CapEx is equipment that you can resell if you shut-down your company. What are the CapEx costs for Ben & Jerry’s? Cost Breakdown: CapEx. Think of CapEx as the BIG physical items that you buy one time and use frequently. Usually, CapEx is equipment that you can resell if you shut-down your company. Encourage students to brainstorm the CapEx costs for Ben & Jerry’s.

COST BREAKDOWN: CAPEX CapEx costs for Ben & Jerry’s: - Delivery Truck - Ice cream making machine - Ice cream packaging machine - Ice cream label making machine What else would be CapEx? Share some of the CapEx costs for Ben & Jerry’s. CapEx costs for Ben and Jerry’s: +Delivery truck +Ice cream making machine +Ice cream packaging machine +Ice cream label making machine What else would be CapEx?

COST BREAKDOWN: OPEX OpEx (AKA: Operating Expenses). Think of OpEx as the costs related to producing the actual “good” you are selling and running the actual company. OpEx is broken down into two main categories: COGS (AKA: Costs of Goods Sold). These are the costs related to making the physical product or delivering the service. Think: milk, sugar, chocolate, cardboard pint containers. Overhead: These are costs related to running the business. Think: lease for facility, insurance for facility, salaries of workers. Cost Breakdown: OPEX OpEx (AKA: Operating Expenses). Think of OpEx as the costs related to producing the actual “good” you are selling & running the actual company.   OpEx is broken into 2 main categories: COGS (AKA: Costs of Goods Sold). These are the costs related to making the physical product or delivering the service, like milk, sugar, chocolate, cardboard pint containers. Overhead Costs: These are costs related to running the business, like the lease for the facility, insurance for the facility, and salaries of workers.

COST BREAKDOWN: BEN & JERRY’S CapEx: Truck, ice cream making machine, packaging machine, label making machine. OpEx: COGS (AKA: Costs of Goods Sold): Milk, sugar, chocolate, cardboard pint containers. Overhead: Lease for facility, insurance for facility, salaries of workers. Recap the cost breakdown for Ben & Jerry’s. CapEx: Truck, ice cream making machine, packaging machine, label making machine. OpEx: COGS (AKA: Costs of Goods Sold): Milk, sugar, chocolate, cardboard pint containers. Overhead: Lease for facility, insurance for facility, salaries of workers.

COST RECAP WHEN YOU BUY A PINT OF ICE CREAM, YOU ARE PAYING FOR ALL OF THE COSTS. Remind students that when they buy ice cream, they are really paying for ALL of those costs.

WHEN YOU SUBSCRIBE TO NETFLIX, WHAT ARE YOU PAYING FOR? ONE MORE BRAINSTORM WHEN YOU SUBSCRIBE TO NETFLIX, WHAT ARE YOU PAYING FOR? CapEx? OpEx? COGS (Costs of Goods Sold)? Overhead? Encourage student to brainstorm ALL of the costs for NetFlix.

COST BREAKDOWN: NETFLIX WHEN YOU SUBSCRIBE TO NETFLIX, WHAT ARE YOU PAYING FOR? CapEx: None OpEx: COGS (AKA: Costs of Goods Sold): Digital licenses for videos, server space to store videos. Overhead: Salaries for workers, rent for office space, insurance, legal fees, accounting fees. When you subscribe to Netflix, what are you paying for?   CapEx: None OpEx: COGS (AKA: Costs of Goods Sold): Digital licenses for videos, server space to store videos. Overhead: Salaries for workers, rent for office space, insurance, legal fees, accounting fees.

COST STRUCTURES

COST STRUCTURE CHARACTERISTICS When determining cost structure, there are three main characteristics: FIXED COSTS: Costs that stay the same no matter how many things you produce or how many people you serve. VARIABLE COSTS: Costs that change as you produce more or serve more people. ECONOMIES OF SCALE: Costs that go DOWN as you produce more or serve more people. Cost Structure Characteristics   When determining cost structure, there are 3 main characteristics: FIXED COSTS: Costs that stay the same no matter how many things you produce or how many people you serve. VARIABLE COSTS: Costs that change the more you produce or the more people you serve. ECONOMIES OF SCALE: Costs that go DOWN the more you produce or the more people you serve.

What are some examples of fixed costs? Brainstorm fixed costs related to student ventures.

FIXED COSTS What are some examples of fixed costs? Salaries/benefits Rent Utility bills Phone bills/communication costs Accounting/bookkeeping Legal/insurance/licensing fees Website Technology Advertising & marketing No matter how much product you make or how many people you serve, these costs are FIXED. They always stay the same. What are some examples of fixed costs? +Salaries/benefits +Utility bills +Accounting/bookkeeping +Website +Advertising and Marketing +Rent +Phone bills/communication costs +Legal/insurance/licensing fees +Technology No matter how much product you make or how many people you serve, these costs are FIXED. They stay the same.

What are some examples of variable costs?

VARIABLE COSTS What are some examples of variable costs? Cost of Goods Sold Materials/supplies Packaging Server Space Postage/shipping These costs go up as you serve more people and produce more goods. They are VARIABLE (they change) based on how much you sell. What are some examples of variable costs?   +Cost of Goods Sold +Materials/supplies +Packaging +Server Space +Postage/shipping The more you produce/the more people you serve - these costs go up. They are VARIABLE (they change) based on how much you sell.

ECONOMIES OF SCALE The more people you serve, the less cost you have. What are some examples of economies of scale? Economies of Scale- What are some examples of economies of scale? This means the more people you serve, the less cost you have?

ECONOMIES OF SCALE To produce 1 shoe, it may cost $1,000 per shoe. To produce 20,000 shoes, it may cost $20 per shoe. Producing 1 pint of ice cream may cost $30. To produce 20,000 pints, it may cost $3 per pint. Economies of Scale: The costs DROP the more you produce. Economies of Scale To produce 1 shoe, it may cost $1,000 per shoe. To produce 20,000 shoes, it may cost $20 per shoe. To produce 1 pint of ice cream, it may cost $30. To produce 20,000 pints, it may cost $3 per pint.   Economies of Scale: The costs DROP the more you produce.

DELIVERABLE: WHAT ARE YOUR COSTS? CapEx: What capital expenditures, if any, will you have? OpEx: COGS (AKA: Costs of Goods Sold): What are your COGS? Overhead: What is your overhead? ** Make sure to indicate which are variable and which are fixed! ** Deliverable: What are your costs? CapEx: What capital expenditures, if any, will you have? OpEx: What are your COGS? What is your overhead? **Indicate which are variable and which are fixed**

TO BREAK DOWN YOUR COSTS COST WORKSHEET USE THE SEED SPOT NEXT COST WORKSHEET TO BREAK DOWN YOUR COSTS