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.

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

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