1. Entrepreneurship Week 10 Costs Estimates

2. 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
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.

3. 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
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.

4. 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’)

5. 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.

6. 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.

7. 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.

8. 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.

9. 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

10. “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?

11. “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?

12. 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

13. 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?

14. 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?

15. 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

16. 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

17. 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 office costs 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 units (22,780 / 46)
I must sell 496 units my first year to break even