The Cost of Doing Business

Fixed vs. Variable Expenses

4 Types of Businesses

Manufacturer

•Creates products with raw materials

•Sells in bulk to wholesalers

Wholesaler

•Buys products in bulk from manufacturers

•Sells in smaller bundles to retailers

Retailer

•Buys smaller bundles from wholesalers

•sells single items to consumers

Service

•Offers a unique set of skills or expertise at a fee

4 Types of Businesses: Defining the Unit of Sale – Example

Manufacturer

•Sells in bulk to wholesalers

1 Unit = 1,000 t-shirts

Wholesaler

•Sells in smaller bundles to Retailers

1 Unit = 12 t-shirts

Retailer

•sells single items to consumers

1 Unit = 1 t-shirt

Service

•Offers a unique set of skills or expertise at a fee1 Unit =4 hours of babysitting service

Expenses

Fixed• Stay constant

regardless of sales• USAIIRD

Variable• Change with each unit of

sale• Total Variable Costs*

• Cost of goods sold• Other variable costs

• Commission• Shipping• Packaging• Spoilage

* Also called Cost of Sales

Fixed Expenses to Operate Business

InterestSalariesAdvertisingInsuranceDepreciationUtilitiesRentOther EXpense

Fixed Expenses

• Focus on fixed expenses• USAIIRD ISAIDUROX• Depreciation - use straight line calculation

• Other Costs• Transportation, Supplies, Maintenance• Professional Development, Education

Labor Expense

• Labor Expense per unit differs from salary

Direct Labor Indirect Labor

COGs Salary

Tied to Product/Service

Tied to Business Operations

Lego Activity Objectives

NFTE’s Objectives:• Introduce students to classifying costs• Engage students in fun Economics of One Unit

exercise

Lego Activity

• In groups, create a toy made by Lego • Survey Lego available in market• Determine target consumer• Design and name the toy• Assemble toy• Determine:

• Material cost• Labor cost• Variable cost

• Fill out the simple worksheet

Lego Activity

• Present back:• The Name of the toy• Target consumer• Your worksheet

Lego Activity Debrief

• What did you think about the activity?• As a Student?• As a Teacher?

• What was the purpose/objective? • How would this work in your classroom?

• Any Modifications?

Economics of 1 UnitFormula:

Contribution Margin = Selling Price – Var. Exp. per unit per unit per unit

(COGS/ + other var. Expense) per unit per unit

Also called “Cost of Sales/unit”

4 Types of Businesses: Defining the Unit of Sale –

A T-shirt Business

Manufacturer

•Sells in bulk to wholesalers

1 Unit = 1,000 t-shirts

Wholesaler

•Sells in smaller bundles to Retailers

1 Unit = 12 t-shirts

Retailer

•sells single items to consumers

1 Unit = 1 t-shirt

Service

•Offers a unique set of skills or expertise at a fee

1 Unit =4 hour hiking trip

When calculating Economics of 1 Unit, it’s important to define our Unit of Sale

Economics of One UnitWholesale or Product Retail

Definition of 1 Unit

Selling Price Per Unit $

Cost of Goods / Services Sold Per Unit

$

Variable Expense Per Unit

Total Cost of Sales Per unit(Total Variable Cost per Unit)

Gross Profit Per Unit $

Cost of Materials/Direct Labor

Cost of Sales Per Unit

Direct Labor(Labor Cost per Hour) (A)

Time (in hours) to make 1 unit (B)

Direct Labor Cost Per Unit (A)*(B)

$ $

Total Direct Labor Per Unit $

Material Description Cost/Total Quantity Cost Per Unit ($)

Total Material Cost Per Unit $

Variable Expenses Per Unit (shipping, commission, packaging) $

Cost of Sales Per Unit (labor +material+vc) $

Economics of One UnitService or Manufacturer

Definition of One Unit

Selling Price per Unit $

Direct Labor Per Unit $

Materials Per Unit

Total COGS (Direct Labor per Unit + Material per unit)

Variable Expense per Unit (shipping, packaging, commission)

Total Cost of Sales Per Unit (Total COGS + VC per Unit)(Total Variable Costs per Unit)

$

Gross Profit Per Unit $

Economics of 1 Unit

• Things to consider:• Direct labor

• How long does it take to assemble one basket?• Customization

• What is the average cost per unit? Find the range• How much customization is affordable?

• Multiple economics of 1 unit• How many economics of 1 unit should there be?

Economics of 1 UnitCustomized Gift Basket

Economics of 1 UnitCustomized Gift Basket

• Calculate economics of 1 unit:• Materials

• 10 Baskets = $10 • Ribbons and cellophane wrap for 10 baskets=

$20.00• Items for 10 baskets = $170.00

• Labor per hour = $6.00• 15 minutes to assemble

• Commission = 10% of sale

Economics of 1 Unit

1. What is the unit of sale for our gift basket?

2. What is our Contribution Margin per Unit?

Turkey Sandwich Exercise

COGS: Turkey Sandwich Exercise

Item Analysis Cost/SandwichTurkey (4 oz.) ($2.60 per lb.)/4 $0.65Bread (Large Roll) ($1.92 per dozen)/12 $0.16Mayonnaise (1 oz.) ($1.60 per 32 oz. Jar)/32 $0.05Lettuce (1 oz.) ($0.80 per lb.)/16 $0.05Tomato (1/4) ($1.12 per tomato)/4 $0.28Pickle (1/4) ($0.20 per pickle)/4 $0.05Wrapper ($10.00 per 1000)/1000 $0.01

Labor per unit: $7.00/ hourHow long to make one unit: .1 hours (<5 minutes)Labor per unit: $.70Cost of Goods Sold per Unit $1.95

Total Sales for One Month Market analysis

• Assume school of 500 students

• How many buy lunch?

• How many bring lunch?

• How many complain about quality of cafeteria food?

• How many participate in after school activities?

• How many selling days in one month?

• How many sandwiches can I make per day?

• How many sandwiches can I sell per day?

Example:Economics of 1 Unit

Lawn care Service

Economics of 1 UnitLawn care Service

• Things to consider:• Average Unit

• What is the average size of a lawn?• What services will you provide the lawn?

• Labor Cost• How do you value your labor per hour?• How many hours of labor will you need to provide?

• Supply cost• What materials will you need to provide?• What is the average amount of materials used on one lawn?

Economics of 1 UnitLawn care Service

• Calculate economics of 1 unit• Average size lawn takes 2 hours• Labor cost per hour = $7.50• Supply Cost

• 3 lawn bags for 1 hour work• 5.99 for 100 heavy duty bags

• 1/4 gallon of gas per 1/2 acre lawn

Cost of Materials/Direct Labor

Definition of One Unit

Cost of Sales Per Unit

Direct Labor

(Labor Cost per Hour) (A)

Time (in hours) to make 1 unit (B)

Direct Labor Cost Per Unit (A)*(B)

$ $

Total Direct Labor Per Unit $

Material Description Cost/Total Quantity Cost Per Unit ($)

Total Material Cost Per Unit $

Total Other Variable Costs Per Unit (shipping, commission, packaging)

$

Cost of Sales Per Unit (labor +material+vc) $

Economics of One UnitService or Manufacturer

Definition of One Unit

Selling Price per Unit $ (A)

Direct Labor per Unit (if applicable) $ (B)

Materials per Unit (if applicable) $ (C)

Total COGS per Unit (B+C) $ (D)

Total Other Variable Costs per Unit

(outgoing shipping, packaging, commissions)

$ (E)

Total Cost of Sales (D+E) $ (F)

Contribution Margin (A-F) $

Sales Assumptions

• What are the assumptions that inform your projections?• Size of market (Target Market)• Full capacity

• How much time can you spend (see time management slide)?

• Do you have help?

• Seasonality • When is the busiest time of year for you, your industry?

• Time to develop a brand presence and establish customer base (ie. No business sells at full capacity immediately)

13

Time Management

Student’s Business Schedule

for a Typical Week

Entrepreneurship Hours 30

School Hours + Homework 60

Work Hours (web design) 20

Free-Time Hours + Sleep 58

Lawn Care Business

Monthly Sales Projections

0

2

4

6

8

J an Feb Mar Apr May J une J uly Aug Sept Oct Nov Dec

Uni

ts S

old

Total Units

Full Capacity

Break-Even Units

Lawn Care Business

Projected Yearly Income Statement

13

Selling Price Per Unit $ (A)

# of Units Sold (B)

Total Sales (A*B) $ (C)

Total COGS (COGS per unit * B) $ (D)

Other Variable Expenses (Other variable costs per unit * B)

$ (E)

Total Variable Costs (D+E) $ (F)

Gross Profit (C-F) $ (G)

Annual Operating Expenses $ (H)

Profit before Taxes (G-H) $ (I)

Less Estimated Taxes @25% (I * .25) $ (J)

Net Profit (I-J) $

Final Financial Thoughts

• Guide Students to the lowest unit• Makes it easier to project costs and describe

business

• Have students map out the entire business process before even looking at any numbers

• Play with numbers in Excel• Remember Financials are fun and tell the

businesses story!

Visual Aid

Visual Aid

Visual Aid