The Lemonade Stand Creating a Business

Step #2: Lemonade Stand Expenses Start-up Costs Variable Costs Fixed Costs

Start-Up Costs Start-Up Costs – the amount of money required to start your business. Brainstorm: What items will you need to start your business? Estimate how much each item will cost.

Variable Costs Variable Costs – how much it costs to make or buy each product you plan to sell. Ex: Retailer of neckties buys each tie at wholesale for $5.00. Variable Cost per unit (per tie) = $5.00 Ex: Retailer of neckties buys 10 ties at wholesale for $5.00 Total Variable Cost (10 / 5.00) = $50.00

Variable Costs Most businesses keep track of their variable costs as they sell their products. Ex: If you sold 20 ties, you would say you have a variable cost of $100.00 It’s called variable cost because the total cost varies depending on how many products you sell. Ex: Buy 20 @ $5.00; only sell 15 – VCP = $75.00 Lemonade Stand Variable cost per unit = 1 cup of lemonade

Variable Costs Activity: Make a list of all ingredients that make up one cup of lemonade. Next to each item, write down how much you will need to make each cup. Calculate how much each cup of lemonade will cost you to make.

Fixed Costs Fixed Costs – the costs a business has to pay on a regular basis. Fixed costs are not directly related to how many products you sell. Ex: Telephone bill, rent payment Keep fixed costs low; the higher the fixed costs, the more you have to sell in order to make enough money just to pay your bills! Overhead – the total of your fixed costs

Fixed Costs U = Utilities (telephone, electricity) S = Salaries A = Advertising (flyers & posters each month) I = Insurance I = Interest (only if you borrowed money for start-up R = Rent (free; business is at home) Lemonade Stand Fixed Expenses = $20 adv.

“Do what it takes to set yourself apart from others” Tips to Remember “Do what it takes to set yourself apart from others” Final Project: When you make your lemonade stand, you will have to differentiate yourself from your competition to make the most profit by the end of the class.

Step #3: Don’t Let Your Business Go Sour! REVENUE – the money brought into a business. Ex: A pizzeria owner sells pizza for $1.00 per slice. Revenue per unit is $1.00 Ex: If he sells 22 slices in one day, his revenue for the day is $22.00

Pricing In order to calculate revenue, you must first set the selling price. #1: Consider your variable cost per unit. Selling price must be higher to make a profit. Keystoning – selling the product for double the cost Ex: Lemonade costs $.10 per unit; sell at $.20

Procedure for Setting Prices A. Begin with a list of suggested prices for selling lemonade B. Estimate the total number of cups of lemonade you might sell at each price C. Calculate potential profit for each price See graph on board for example

Each cup of lemonade gives you a profit of $.40 Gross Profit Gross Profit – revenue minus variable costs Ex: Revenue per unit ($.60) – Variable cost per unit ($.20) = Gross profit per unit ($.40) (24 / 40 = .60) (given) (.60 - .20 = .40) Each cup of lemonade gives you a profit of $.40

Tip of the Day Every business person should know how many products the business must sell each month in order to stay in business.

Break-Even Formula Break-Even Point in Units: Total Monthly Fixed Costs/Gross Profit per unit (Sales Price per unit-Variable cost per unit) Lemonade Stand: $20/$.40 = 50 In other words: You must sell 50 cups of lemonade each month to “break-even” Break-Even Point in Dollars: Break-Even Point in Units x Sales Price per Unit Lemonade Stand: 50 x .60 = $30.00

Break-even Example: Your company sells socks. The revenue per unit = $1.50. Variable cost per unit = $.75 Monthly fixed expenses: Advertising = $15 Utilities = $25 Interest = $10 Calculate break-even point in units

Answer: 1.50 - .75 = .75 15 + 25 + 10 = 50 50 / $.75 = 66.7 You must sell 66.7 (or) 67 socks each month to break-even.

Step #4: The Bottom Line Sales Forecast - how many products you can sale in a given time period Sales Forecast Example: See overhead

#5: The Income Statement Income Statement – a financial statement that indicates how much money a business earns or loses during a particular period. Also know as profit and loss statement