Entrepreneurship Week 10 Costs Estimates

Cost Estimates - Review Labor - programmer 1000 O.R. /month Labor – clerical assistant 500 O.R. /month Office rental 300 O.R. /month Phone service 5 O.R./month Email service Web site creation 20 O.R. Web site hosting Advertising brochures 50 O.R./1000 Software manuals 2 0.R. each Software disks 1 O.R. each Mailing costs for software Conference exhibit fee 500 O.R. Airfare to conference meeting 150 O.R. Hotel cost at conference 200 O.R. Food cost at Conference 80 O.R.

Cost Types – Start up, continual, by sale Start up or Continual Labor - programmer 1000 O.R. /month Continual Labor – clerical assistant 500 O.R. /month Office rental 300 O.R. /month Phone service 5 O.R./month Email service Web site creation 20 O.R. Start up Web site hosting Advertising brochures 50 O.R./1000 Software manuals 2 0.R. each By sale Software disks 1 O.R. each Mailing costs for software Conference exhibit fee 500 O.R. Airfare to conference meeting 150 O.R. Hotel cost at conference 200 O.R. Food cost at Conference 80 O.R.

Cost categories Start up – An initial purchase for your business – usually equipment, or marketing materials Continual – payments you are usually committed to making every month (“fixed costs”) By sale – costs that only occur if you sell a product - food for your restaurant, clothing for your store (“marginal costs’)

Cost Problems Start up – high start up costs require that you have more money to start the business Continual – high fixed costs mean you will lose money quickly if you do not have many sales By sale – low marginal revenue means you make very little from each sale, so you will need to sell many items to cover your costs.

Cost Responses Start up –Find ways to reduce your startup costs – buy used equipment or sell over a web site rather than through a store Continual – reduce fixed costs by using less labor By sale – increase marginal revenue by raising your prices. Do NOT complete on low cost, but by better service or some other competitive advantage.

Cost Responses Example – flower shop Start up –Find a used refrigerator for your flowers. Decorate the store yourself. Continual – reduce fixed costs by doing all the flower arrangements yourself. Do not hire a clerk. By sale – Use the same price for flowers as other stores, but open your store longer hours, or design special flower arrangements for weddings that are truly unique.

Cost Responses For your business Start up –List 2 start up costs you can reduce Continual – List 2 ways to cut your fixed costs By sale – List one way you can raise the price of your product and still be competitive.

Estimating Income Marginal Income = sales – cost of good sold 1 ice cream cone Income = 500 (customer price) – 160 (my cost for the ice cream) Marginal Income = 340 Baisas

“Real” Income Monthly income = unit income * units sold – fixed costs My store earns (340 * number of cones sold) – Fixed costs (store rental, labor, web site, phones, electricity, etc.) If you sell 1000 ice cream cones and your fixed costs are 500 OMR, will your store turn a profit this month? If not, how many do you need to sell?

“Real” Income Monthly income = unit income * units sold – fixed costs My restaurant earns 500 baisas on each meal sold How many meals do I have to sell if my fixed costs are 800 OMR per month? How many meals is that per day?

Fix the problem - restaurant Monthly income = unit income * units sold – fixed costs My restaurant earns 500 baisas on each meal sold My fixed costs are 800 OMR per month Tell me how to raise income from sales, or reduce fix costs

Fix the problem – flower shop Monthly income = unit income * units sold – fixed costs My store earns 200 baisas for each flower sold My fixed costs (rent, labor, electricity) are 600 OMR per month How many flowers do I need to sell each month?

Fix the problem – flower shop Monthly income = unit income * units sold – fixed costs My store earns 200 baisas for each flower sold My fixed costs (rent, labor, electricity) are 600 OMR per month I sell my flowers for 500 baisas each. So does every other flower shop. If I sold my flowers for 400 baisas, how many would I need to sell each month? Is there a way I could sell my flowers for 600 baisas?

Break Even point Month 1 2 3 4 5 6 7 8 9 10 11 12 Labor costs 1500 Office costs 335 315 Conference costs   980 C.O.G.S. 200 Total costs 1835 1815 3015 2015 Revenue 2500 Profit/(loss) (1835) (515) 485 Yearly profit/(loss) (3670) (4185) (3700) (3215) (2730) (2245) (1760) (1275) (790) (305) 180

50 OR price – 2 OR manual printing, 1 OR disk cost, 1 OR mailing cost Cost of good Sold Cost of Goods Sold (COGS) includes the cost of printing each software manual (2 OR), the cost of the disk (1 OR), and the cost of mailing (1 OR). I assume sales of 50 units each month for total cost of 200 O.R. (4 O.R. X 50 units) Revenue assumes 50 programs sold each month for 50 O.R. each. Unit income = 46 50 OR price – 2 OR manual printing, 1 OR disk cost, 1 OR mailing cost

I must sell 496 units my first year to break even Break Even Point Total costs to operate for 1 year / unit income Fixed costs include one year of labor, one year of office expenses, and the conference costs. This totals to 22,780 (18000 labor costs + 3800 office costs + 980 conference costs) Variable costs are the selling price of my software (50 O.R.) less the cost of making and mailing each program (4 O.R.) So my breakeven point for sales is 495.2 units (22,780 / 46) I must sell 496 units my first year to break even