Assignment: Select a very simple business, one with a single product or one with approximately the same contribution margin percentage for all products.
Some possibilities are:
- A child's lemonade stand
- A retail video rental store
- An espresso cart
- A retail store selling compact disks
- An athletic shoe store
- A cookie stand in a mall
- An attorney's office
Note: Do not select a business that has been used by another student. Read the discussion board entries before you select your businesses.
1. Make a list of all fixed costs associated with running the business you selected. Estimate the amount of each fixed cost per month (or per day or per year, if one of them is more appropriate for your business).
NOTE: You must first decide the cost per unit for the product or products you are going to make. You cannot "go backwards" and decide the total cost unless the cost you are analyzing is strictly fixed.
2. Make a list of all variable costs associated with making or obtaining the product or service your company is selling. Estimate the cost per unit for each variable cost.
3. Given the fixed and variable costs you have identified, compute the break-even point for your business in either units or dollars.
4. Assess the prospects of your business making a profit.
AND, be very careful when you identify variable costs. Remember that variable costs per unit are identified BEFORE production and/or capacity are known? That is, the variable costs stay constant regardless of the number of units produced.