1. The Lemonade Stand
Creating a Business

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

3. 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.

4. 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

5. 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 $5.00; only sell 15 – VCP = $75.00
Lemonade Stand
Variable cost per unit = 1 cup of lemonade

6. 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.

7. 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

8. 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.

9. “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.

10. 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

11. 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

12. 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

13. 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) ( = .40)
Each cup of lemonade gives you a profit of $.40

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

15. 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

16. 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

17. Answer:
= .75
= 50
50 / $.75 = 66.7
You must sell 66.7 (or) 67 socks each month to break-even.

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

19. #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