Profitability 101 Module 1: Course Overview 1 Welcome to Profitability 101. This course covers concepts regarding profitability and explores how different tactics and strategies affect volume growth and profitability. The primary purpose is to provide you with information that will allow you to make decisions that produce profitable growth. This course is divided into the following modules: 1. 2. 3. 4. 5. 6. 7. 8. Course Overview Financial Basics Building a Business Various Approaches to Profitability Calculating the Impact of Change Strategies to Improve Profitability Reacting to Competition Course Summary
Profitability 101 Module 1: Course Overview 1 Navigation Instructions View course resources Turn the audio on or off Go to the next page Go to the previous page This e. Learning course will take you about an hour to complete, not including the assessment. The course has an easy-to-use interface that allows you to navigate through the course. There are buttons at the bottom of the screen that allow for screen-by -screen navigation. Click the Next button to move to the next screen. Click the Previous button to return to an earlier screen. Click the Resources button for course resources such as a Glossary that includes definitions and explanations of acronyms. If you need to know what an acronym stands for, simply access the course glossary from any page. This course includes several animations. To launch the animation, click the Play button and then follow the instructions until the animation is completed. Click the Audio button to turn off or turn on the audio.
Profitability 101 Module 1: Course Overview 1 Navigation Instructions (continued) Jump to a section (only available for completed sections) The course is divided into modules so that you can go through the material in sections. If you exit the course and then sign in again, the course bookmarking function will ask if you want to return to the page you were on when you exited the course. To exit the course, click the Close button (Red X) in the upper-right corner of the screen. Module numbers appear at the top of the screen. You cannot proceed to the next module until you have viewed all of the content in the current module. You can return to any previously viewed module by clicking the module number. Sometimes the amount of text for the page will exceed the viewable space on the screen. In these cases, a scroll bar will display on the right side of the text. Click and drag the scroll bar to view all of the text on the page.
Profitability 101 Module 1: Course Overview 1 Navigation Instructions (continued) Throughout the course, you will be asked to complete Knowledge Check questions. You must successfully answer each question before you can proceed to the next screen. Follow the instructions on the screen to answer each question. At the end of the course, there is a scored assessment. There are instructions for you to read prior to starting the assessment.
Profitability 101 Module 1: Course Overview 1 Profitability 101: Course Objectives This course begins to explore financial concepts associated with the Price and Margin Realization initiative. By the end of this course, you will be able to: • Describe the basic relationship of revenue, costs and profit • Define the terms “margin, ” “fixed costs” and “variable costs” • Discuss the differences among Product Margin, Direct Contribution Margin, Gross Margin and External Operating Profit • Describe why Direct Contribution Margin is an effective measure of profitability • Calculate the impact decisions you make can have on your business
Profitability 101 Module 2: Financial Basics 2 Financial Basics: Module Objectives This module explores basic financial concepts. At the end of this module you will be able to: • Describe the basic relationship of revenue, costs and profit • Define the terms “margin, ” “fixed costs” and “variable costs”
Profitability 101 Module 2: Financial Basics What is Profit? Begin with the most basic concept of profit. Profit, also called margin, is revenue, or income, minus costs. For profit to be positive, revenue must be greater than costs. When costs are greater than revenue, you have a negative profit, more commonly called a loss. Later on in this course you will explore other ways of looking at profitability. 2 The Basics: Revenue Minus Costs = Profit Revenue (Income) - Costs Profit (Margin)
Profitability 101 Module 2: Financial Basics Two Types of Cost On the right is a skeleton of what is known as an analytical Profit and Loss (P&L) statement. You build the analytical P&L by identifying two kinds of costs: 2 The Basics: Revenue Minus Costs = Profit Revenue (Income) - Costs Variable • Fixed Costs • Variable Costs Click Variable and Fixed to see definitions of those two terms. Fixed Profit (Margin)
Profitability 101 Module 2: Financial Basics 2 The Basics: Revenue Minus Costs = Profit The same text that is on the first slide in this series will be on this page. Just want to have one instance to make sure changes are captured correctly. Revenue (Income) - Costs Variable Costs vary with the number of items you make or sell. Variable Costs are the costs of those things you “use up” or “convert” to make a product. Variable Costs are the costs needed to make, sell and deliver one more unit. If you make more product, you need more materials and your variable costs are greater. Fixed Profit (Margin)
Profitability 101 Module 2: Financial Basics 2 The Basics: Revenue Minus Costs = Profit The same text that is on the first slide in this series will be on this page. Just want to have one instance to make sure changes are captured correctly. Revenue (Income) - Costs Variable Fixed costs are independent of the number of items you make or sell. Fixed costs are the costs for things you do not “use up” to make a product. The fixed cost of an item is what it is. Whether you make two items or 2, 000 items, your fixed costs stay the same. Fixed Profit (Margin)
Profitability 101 Module 2: Financial Basics Build a Business To illustrate the complex concepts of variable and fixed costs, margin and profitability, this course is going to explore how they work in a simple example. You will identify fixed and variable costs and explore the financial impact of a variety of scenarios on Lemonade Inc. , your very own lemonade business. 2
Profitability 101 Module 2: Financial Basics 2 Knowledge Check The phrases below are associated with either fixed costs or variable costs. Drag each phrase to the appropriate column. Click Submit to. check your answers. Variable Cost Fixed Cost Used up in manufacturing process Independent of the number of items made or sold Submit Maps to objective 2 Also an assessment item
Profitability 101 Module 2: Financial Basics 2 Knowledge Check The phrases below describe either with fixed costs or variable costs. Drag each phrase to the appropriate column. Click Submit to check. your answers. Variable Cost Fixed Cost Used up in manufacturing process Independent of the number of items made or sold Submit Maps to objective 2 Also an assessment item
Profitability 101 Module 3: Building a Business 3 3 Building a Business: Module Objectives This module covers fixed and variable costs associated with making, selling and marketing a product. Upon completing this module, you will be able to: • • Differentiate various fixed and variable costs relating to building a lemonade business Build an analytical Profit & Loss statement for the lemonade business
Profitability 101 Module 3: Building a Business Multiple Choice 3 3 Drag and Drop The Lemonade Game Get ready to play The Lemonade Game. Here is how it works: Playing The Game You will be shown a game card that describes various cost items needed to build a viable lemonade business and asked to decide if those costs are fixed costs or variable costs. You can also select Give me a hint or Give me the answer. There are two types of answer selections. One is multiple choice: you select your answer from a list of possible answers. After you have made your selection, click the Submit button. The other is a “drag-and-drop: ” drag each item to the correct target area. If you have dragged the item to the correct area, it will stay. If you have dragged the item to the incorrect area, it will return to its original location. Click the tabs to switch back and forth between examples of a multiple choice or drag and drop question.
Profitability 101 Module 3: Building a Business Multiple Choice 3 3 Drag and Drop
Profitability 101 Module 3: Building a Business 3 3 The Lemonade Game (continued) Scoring You are awarded points, depending on your response. If you answer a multiple choice question correctly without asking for a hint, you get two points. If you ask for a hint and answer the question correctly, you get one point. If you answer incorrectly or if you select Give me the answer, you get 0 points. For drag-and-drop questions, you start with a total number of possible points based on the number of items available. If there are four items available, the total number of possible points is 8. If you drag all items to the correct target area, you get all available points. If you drag an item to an incorrect location and have not asked for hint, you lose two points. If you ask for a hint, the total number of possible points is cut in half. If you then drag an item to the incorrect location, you lose one point. If you place all items incorrectly or if you select Give me the answer, you get 0 points. The highest score possible is 40. The game starts on the next screen.
Profitability 101 Module 3: Building a Business 3 3 Are the lemons in your lemonade: Got Lemons? To build a business, you start by spending money — you begin with costs. One of the first costs associated with making lemonade is, of course, the lemons. Given what you know about fixed and variable costs, are lemons a fixed cost or a variable cost? Make a selection, then click the Submit button to check your answer. A variable cost? A fixed cost? Give me a hint. Give me the answer. X Your Score Submit
Profitability 101 Module 3: Building a Business 3 3 Are the lemons in your lemonade: Hint Lemons get used up as you make your lemonade. A variable cost? Make a selection, then click the Submit button to check your answer. A fixed cost? Give me the answer. X Your Score Submit
Profitability 101 Module 3: Building a Business Here’s Your Answer! Because the overall cost for lemons depends on the number of batches you make, lemons are an example of a variable cost item. The more batches you make, the more materials you need. The total number of lemons you need depends on the number of batches of lemonade you believe you can sell. 3 3 Are the lemons in your lemonade: √ A variable cost? A fixed cost? Give me the answer. In your secret family recipe, you need exactly 8 lemons per batch of lemonade. = = X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! Because the overall cost for lemons depends on the number of batches you make, lemons are an example of a variable cost item. The more batches you make, the more materials you need. 3 3 Are the lemons in your lemonade: √ A variable cost? A fixed cost? The total number of lemons you need depends on the number of batches of lemonade you believe you can sell. In your secret family recipe, you need exactly 8 lemons per batch of lemonade. = = X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s Incorrect. Because the overall cost for lemons depends on the number of batches you make, lemons are an example of a variable cost item. The more batches you make, the more materials you need. 3 3 Are the lemons in your lemonade: A variable cost? √ A fixed cost? The total number of lemons you need depends on the number of batches of lemonade you believe you can sell. In your secret family recipe, you need exactly 8 lemons per batch of lemonade. = = X Your Score
Profitability 101 Module 3: Building a Business 3 3 Are your pitchers: Big Pitcher You also need to squeeze the lemons into something. So buy a few pitchers and use them until you lose them … or break them. Given what you know about fixed and variable costs, are pitchers a fixed cost or a variable cost? Make a selection, then click the Submit button to check your answer A variable cost? A fixed cost? Give me a hint. Give me the answer. X Your Score Submit
Profitability 101 Module 3: Building a Business 3 3 Are your pitchers: Hint The cost of pitchers is what it is and does not depend on the number of batches of lemonade that you make. Make a selection, then click the Submit button to check your answer. A variable cost? A fixed cost? Give me the answer. X Your Score Submit
Profitability 101 Module 3: Building a Business Here’s Your Answer! The pitchers cost what they cost, whether you make one batch of lemonade or 100 batches of lemonade. 3 3 Are your pitchers: A variable cost? √ A fixed cost? The cost of the pitchers is an example of a fixed cost. X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! The pitchers cost what they cost, whether you make one batch of lemonade or 100 batches of lemonade. 3 3 Are your pitchers: A variable cost? √ A fixed cost? The cost of the pitchers is an example of a fixed cost. X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s Incorrect. The pitchers cost what they cost, whether you make one batch of lemonade or 100 batches of lemonade. 3 3 Are your pitchers: √ A variable cost? A fixed cost? The cost of the pitchers is an example of a fixed cost. X Your Score
Profitability 101 Module 3: Building a Business 3 3 Is the cost of replacing a broken pitcher: Broken Pitcher One month after buying your pitchers, you break one of them and buy a new one. You pay $1 more than you did for the pitchers you bought previously. A variable cost? A fixed cost? Give me a hint. Give me the answer. Is the cost of replacing a broken pitcher a variable cost or a fixed cost? Make a selection, then click the Submit button to check your answer X Your Score Submit
Profitability 101 Module 3: Building a Business 3 3 Is the cost of replacing a broken pitcher: Hint While the cost of the pitcher has changed over time, it still does not depend on the number of batches of lemonade that you make. Make a selection, then click the Submit button to check your answer. A variable cost? A fixed cost? Give me the answer. X Your Score Submit
Profitability 101 Module 3: Building a Business Here’s Your Answer! The cost of the new pitcher to replace the broken pitcher is still a fixed cost. “Fixed” does not mean that the price of the item is unchanging, but that the price is what it is, regardless of the amount of product you manufacture and sell. 3 3 Is the cost of replacing a broken pitcher: A variable cost? √ A fixed cost? X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! The cost of the new pitcher to replace the broken pitcher is still a fixed cost. “Fixed” does not mean that the price of the item is unchanging, but that the price is what it is, regardless of the amount of product you manufacture and sell. 3 3 Is the cost of replacing a broken pitcher: A variable cost? √ A fixed cost? X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s Incorrect. The cost of the new pitcher to replace the broken pitcher is still a fixed cost. “Fixed” does not mean that the price of the item is unchanging, but that the price is what it is, regardless of the amount of product you manufacture and sell. 3 3 Is the cost of replacing a broken pitcher: √ A variable cost? A fixed cost? X Your Score
Profitability 101 Module 3: Building a Business 3 3 Revenue (Income) Building Your P&L Begin to build your analytical P&L. You know that you have both variable and fixed Product costs. Lemons are a variable cost, and your pitcher is a fixed cost. - Costs Variable Product Lemons Spoon Ice To make your lemonade you also need water, sugar, ice and a spoon you will use to stir each batch. Which of these are variable cost items and which are fixed cost items? Either drag each item to the appropriate area or select Give me a hint or select Give me the answer. Water Pitcher Fixed Product Sugar Submit Give me a hint. Profit (Margin) Give me the answer. X Your Score
Profitability 101 Module 3: Building a Business 3 3 Revenue (Income) Hint Water, ice and sugar are all “used up” as you make lemonade. The spoon is not. Either drag each item to the appropriate area or select Give me the answer. - Costs Variable Product Lemons Water Spoon Ice Pitcher Sugar Fixed Product Profit (Margin) Submit Give me the answer. X Your Score
Profitability 101 Module 3: Building a Business Here’s Your Answer The spoon costs what it costs, no matter how many batches of lemonade you make. It is a fixed cost item. 3 3 Revenue (Income) - Costs Variable Product Lemons Sugar Water Ice The amount of sugar, ice and water that you use does depend on how many batches of lemonade you make. These are all variable cost items. Fixed Product Profit (Margin) Pitcher Spoon X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! The spoon costs what it costs, no matter how many batches of lemonade you make. It is a fixed cost item. 3 3 Revenue (Income) - Costs Variable Product Lemons Sugar Water Ice The amount of sugar, ice and water that you use does depend on how many batches of lemonade you make. These are all variable cost items. Fixed Product Profit (Margin) Pitcher Spoon X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s Incorrect. You dragged at least some items to the incorrect location. The correct placement is shown. 3 3 Revenue (Income) - Costs Variable Product Lemons Sugar Water Ice The spoon costs what it costs, no matter how many batches of lemonade you make. It is a fixed cost item. The amount of sugar, ice and water that you use does depend on how many batches of lemonade you make. These are all examples of variable cost items. Fixed Product Profit (Margin) Pitcher Spoon X Your Score
Profitability 101 Module 3: Building a Business 3 3 Is your time: Pay Day You decide to pay yourself, and you want to account for all of your time accurately. A variable cost? A fixed cost? Give me a hint. Are the hours you spend squeezing the lemons and mixing the lemonade a variable cost or a fixed cost? Give me the answer. Make a selection, then click the Submit button to check your answer. X Your Score Submit
Profitability 101 Module 3: Building a Business 3 3 Is your time: Hint The amount of time you spend working depends on the number of batches of lemonade you make. A variable cost? A fixed cost? Make a selection, then click the Submit button to check your answer. Give me the answer. X Your Score Submit
Profitability 101 Module 3: Building a Business Here’s Your Answer Your time and labor to make the lemonade is a variable cost for the same reason that the sugar is a variable cost. 3 3 Is your time: √ A variable cost? A fixed cost? The need for the material, and therefore its cost, varies with the amount of product your make. The resource — in this case, your time — is “used up” in the manufacturing process. X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! Your time and labor to make the lemonade is a variable cost for the same reason that the sugar is a variable cost. 3 3 Is your time: √ A variable cost? A fixed cost? The need for the material, and therefore its cost, varies with the amount of product your make. The resource — in this case, your time — is “used up” in the manufacturing process. X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s Incorrect! Your time and labor to make the lemonade is a variable cost for the same reason that the sugar is a variable cost. 3 3 Is your time: A variable cost? √ A fixed cost? The need for the material, and therefore its cost, varies with the amount of product your make. The resource — in this case, your time — is “used up” in the manufacturing process. X Your Score
Profitability 101 Module 3: Building a Business To Market, To Market Now you have a product — lemonade— and you have identified fixed and variable costs associated with making that product. But as everyone in Sales, Marketing and Merchandising knows, having a product is only half the battle. You also need place and promotion. In the next section of the Lemonade Game, you are asked to identify fixed and variable costs associated with selling your product and getting it to market. 3 3
Profitability 101 Module 3: Building a Business 3 3 Is your spending for warrant claims: Satisfaction Part of the cost of bringing a product to market includes the costs associated with guaranteeing customer satisfaction. You know that most people who say they do not like lemonade love your lemonade. To get people who would not normally drink lemonade to try your product, you offer a warranty: you guarantee that either your customers are 100 percent satisfied with your lemonade or they get their money back. A variable cost? A fixed cost? Give me a hint. Give me the answer. Is the amount you spend returning money to dissatisfied customers a fixed cost or a variable cost? Make a selection, then click the Submit button to check your answer. Submit X Your Score
Profitability 101 Module 3: Building a Business 3 3 Is your spending for warrant claims: Hint Warranty claims depend on the number of returns. A variable cost? Make a selection, then click the Submit button to check your answer. A fixed cost? Give me the answer. X Your Score Submit
Profitability 101 Module 3: Building a Business Here’s Your Answer! The amount of money you spend in warranty claims varies with the number of returned glasses. 3 3 Is your spending for warrant claims: √ A variable cost? A fixed cost? Warranty claims are an example of a variable cost associated with selling your product. X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! The amount of money you spend in warranty claims varies with the number of returned glasses. 3 3 Is your spending for warrant claims: √ A variable cost? A fixed cost? Warranty claims are an example of a variable cost associated with selling your product. X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s Incorrect. The amount of money you spend in warranty claims varies with the number of returned glasses. 3 3 Is your spending for warrant claims: A variable cost? √ A fixed cost? Warranty claims are an example of a variable cost associated with selling your product. X Your Score
Profitability 101 Module 3: Building a Business More Warranty Costs In addition to warranty claims, you have other costs associated with your warranty, including specialized software to record and track warranty claims and a computer to run the software. You also decide to have 1, 000 warranty information cards printed. The warranty cards are placed on your counter, and a customer can take one if he or she wants. 3 3 Revenue (Income) - Costs Variable Product Warranty Is each item a fixed cost or a variable cost? Either drag each item to the appropriate area or select Give me a hint or select Give me the answer. Claims Computer Software Warranty Cards Fixed Product Warranty Warrant Tracker Warranty Submit Give me a hint. Profit (Margin) Give me the answer. X Your Score
Profitability 101 Module 3: Building a Business 3 3 Revenue (Income) Hint Are these items used up as you make lemonade? If you return one glass or 100, will their costs vary? Either drag each item to the appropriate area or select Give me the answer. - Costs Variable Product Warranty Claims Computer Software Warranty Cards Fixed Product Warranty Profit (Margin) Submit Warrant Tracker Warranty Give me the answer. X Your Score
Profitability 101 Module 3: Building a Business Here’s Your Answer Warrant Tracker Warranty All three items — the computer, the warranty tracking software, and the warranty cards — are fixed costs. They cost what they cost, no matter how much lemonade you make or how many refunds you provide. Even if you eventually need to buy more warranty information cards, you purchase them just as if you were replacing a broken pitcher or buying a new computer. 3 3 Revenue (Income) - Costs Variable Product Warranty Fixed Product Warranty Profit (Margin) Claims Computer Tracking Software Warranty Cards X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! Warrant Tracker Warranty All three items — the computer, the warranty tracking software, and the warranty cards — are fixed cost items. They cost what they cost, no matter how much lemonade you make or how many refunds you provide. Even if you eventually need to buy more warranty information cards, you purchase them just as if you were replacing a broken pitcher or buying a new computer. 3 3 Revenue (Income) - Costs Variable Product Warranty Fixed Product Warranty Profit (Margin) Claims Computer Tracking Software Warranty Cards X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s Incorrect. You dragged at least some items to the incorrect location. The correct placement is shown. Warrant Tracker Warranty All three items — the computer, the warranty tracking software, and the warranty cards — are fixed cost items. They cost what they cost, no matter how much lemonade you make or how many refunds you provide. Even if you eventually need to buy more warranty information cards, you purchase them just as if you were replacing a broken pitcher or buying a new computer. 3 3 Revenue (Income) - Costs Variable Product Warranty Fixed Product Warranty Profit (Margin) Claims Computer Tracking Software Warranty Cards X Your Score
Profitability 101 Module 3: Building a Business 3 3 Good To Go Your customers say they would buy more lemonade if you would deliver it to them rather than make them come to your stand. That sounds good to you. You decide to deliver. That means you have added freight costs. ery Deliv n Do
Profitability 101 Module 3: Building a Business Mind Your Own Business However, you are in the lemonade business, not the delivery business, so you contract with Don’s Delivery Service to deliver your lemonade. Don’s delivers lemonade to each of your customers. You pay Don’s for every delivery he makes. Are your delivery costs fixed costs or variable costs? Make a selection, then click the Submit button to check your answer. 3 3 Are your delivery costs: A variable cost? A fixed cost? Give me a hint. Give me the answer. . X Your Score
Profitability 101 Module 3: Building a Business Hint Will your costs be constant or will they vary depending on the number of deliveries Don’s makes for you? Make a selection, then click the Submit button to check your answer. 3 3 Are your delivery costs: A variable cost? A fixed cost? Give me the answer. X Your Score
Profitability 101 Module 3: Building a Business Here’s Your Answer! Your delivery costs are variable costs because they vary with the number of lemonade batches you sell that require delivery. 3 3 Are your delivery costs: √ A variable cost? A fixed cost? You spend less on delivery if Don’s has to make 2 deliveries than you do if Don’s has to make 10 deliveries. X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! Your delivery costs are variable costs because they vary with the number of lemonade batches you sell that require delivery. 3 3 Are your delivery costs: √ A variable cost? A fixed cost? You spend less on delivery if Don’s has to make 2 deliveries than you do if Don’s has to make 10 deliveries. X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s Incorrect. Your delivery costs are variable costs because they vary with the number of lemonade batches you sell that require delivery. 3 3 Are your delivery costs: A variable cost? √ A fixed cost? You spend less on delivery if Don’s has to make 2 deliveries than you do if Don’s has to make 10 deliveries. X Your Score
Profitability 101 Module 3: Building a Business Anything Fixed? Since Don’s is handling all your deliveries, do you have any fixed costs associated with freight? Make a selection, then click the Submit button to check your answer. 3 3 Do you have any fixed delivery costs? Yes No Give me a hint. Give me the answer. X Your Score
Profitability 101 Module 3: Building a Business Hint Do you have any costs that will stay the same no matter how much or how little lemonade you make or deliver? Make a selection, then click the Submit button to check your answer. 3 3 Do you have any fixed delivery costs? Yes No Give me the answer. X Your Score
Profitability 101 Module 3: Building a Business Here’s Your Answer! You have no delivery costs unless Don’s makes a delivery for you. Therefore, you have no fixed costs. 3 3 Do you have any fixed delivery costs? Yes √ No X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! You have no delivery costs unless Don’s makes a delivery for you. Therefore, you have no fixed costs. 3 3 Do you have any fixed delivery costs? Yes √ No X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s Incorrect. 3 3 Do you have any fixed delivery costs? You have no delivery costs unless Don’s makes a delivery for you. √ Yes Therefore, you have no fixed costs. No X Your Score
Profitability 101 Module 3: Building a Business P&L Update Put delivery under the heading “Freight” and add Freight to your list of variable costs in your P&L. You have no separate items to list under Freight. 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Fixed Product Warranty Profit (Margin)
Profitability 101 Module 3: Building a Business Warehousing If you make more lemonade than you can sell in a day, or if you make a batch of lemonade ahead of time for sale the next day, you need a place to store the lemonade. You buy a mini-refrigerator to store lemonade and extra lemons. Just in case your storage needs become greater than the mini-refrigerator can handle, you negotiate an agreement with your Mom to rent space in her refrigerator to store excess lemonade. Add warehousing to your P&L. Is each warehousing cost a variable cost or a fixed cost? Either drag each item to the appropriate area or select Give me a hint or select Give me the answer, then click the Submit button. You get credit for all correct selections. 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Mini-refrigerator Mom’s refrigerator Fixed Product Warranty Warehousing Profit (Margin) Give me a hint. Give me the answer. X Your Score
Profitability 101 Module 3: Building a Business Hint The cost of one of these items is constant, and the other depends on how much lemonade you need to store. Either drag each item to the appropriate area or select Give me the answer, then click the Submit button. 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Mini-refrigerator Mom’s refrigerator Give me the answer. Fixed Product Warranty Warehousing Profit (Margin) X Your Score
Profitability 101 Module 3: Building a Business Here’s Your Answer Your cost for the minirefrigerator remains the same whether it holds a pitcher only once or every day. Since the cost of the mini-refrigerator is not based on the number of days it is used or the number of batches it holds, it is a fixed cost. However, the cost of storing lemonade in your Mom’s refrigerator does depend on the number of days it is used, so that cost is a variable cost. 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Fixed Product Warranty Warehousing Profit (Margin) Mom’s refrigerator Mini-refrigerator X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! Your cost for the minirefrigerator remains the same whether it holds a pitcher only once or every day. Since the cost of the mini-refrigerator is not based on the number of days it is used or the number of batches it holds, it is a fixed cost. However, the cost of storing lemonade in your Mom’s refrigerator does depend on the number of days it is used, so that cost is a variable cost. 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Fixed Product Warranty Warehousing Profit (Margin) Mom’s refrigerator Mini-refrigerator X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s Incorrect! You dragged at least some items to the incorrect location. The correct placement is shown. Your cost for the minirefrigerator remains the same whether it holds a pitcher only once or every day. Since the cost of the mini-refrigerator is not based on the number of days it is used or the number of batches it holds, it is a fixed cost. However, the cost of storing lemonade in your Mom’s refrigerator does depend on the number of days it is used, so that cost is a variable cost. 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Fixed Product Warranty Warehousing Profit (Margin) Mom’s refrigerator Mini-refrigerator X Your Score
Profitability 101 Module 3: Building a Business 3 3 Engineering = Innovation Engineering is, in many ways, synonymous with “innovation. ” Engineering develops the products that are luxuries today and necessities tomorrow. Strawberry flavored lemonade Engineering is essential to future success. Even in the lemonade business, you cannot stand still or you will be overcome by the competition, so you engineer several different flavors of lemonade. Lime flavored lemonade Grape flavored lemonade Cherry flavored lemonade
Profitability 101 Module 3: Building a Business Fixed or Variable? Are engineering costs — the costs associated with innovation — fixed or variable? Make a selection, then click the Submit button to check your answer. 3 3 Are engineering costs: A variable cost? A fixed cost? Give me a hint. Give me the answer. X Your Score
Profitability 101 Module 3: Building a Business Hint Will your engineering costs — the costs that are strictly associated with innovation — be any different if you sell more lemonade or less lemonade? Make a selection, then click the Submit button to check your answer. 3 3 Are engineering costs: A variable cost? A fixed cost? Give me the answer. X Your Score
Profitability 101 Module 3: Building a Business Here’s Your Answer! Engineering costs are not directly related to the amount of lemonade you sell. Therefore, all engineering costs are recorded as fixed costs. 3 3 Are engineering costs: A variable cost? √ A fixed cost? X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! Engineering costs are not directly related to the amount of lemonade you sell. Therefore, all engineering costs are recorded as fixed costs. 3 3 Are engineering costs: A variable cost? √ A fixed cost? X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s incorrect. Engineering costs are not directly related to the amount of lemonade you sell. Therefore, all engineering costs are recorded as fixed costs. 3 3 Are engineering costs: √ A variable cost? A fixed cost? X Your Score
Profitability 101 Module 3: Building a Business P&L Update Add Engineering your list of fixed costs in your P&L. 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Fixed Product Warranty Warehousing Engineering Profit (Margin)
Profitability 101 Module 3: Building a Business Consumer Premiums As a marketing program, you decide to offer a free straw as a consumer premium with the purchase of every glass of lemonade. 3 3
Profitability 101 Module 3: Building a Business Straw Poll You buy straws and a straw dispenser to hold them. In your P&L, you put these in the category “Other Costs of Sales. ” Is each item a fixed cost or a variable cost? Either drag each item to the appropriate area or select Give me a hint or select Give me the answer, then click the Submit button. You get credit for all correct selections. 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Other costs of sales Straws Multi. Colored Straws Straw dispenser Give me a hint. Give me the answer. Fixed Product Warranty Warehousing Engineering Other costs of sales Profit (Margin) X Your Score
Profitability 101 Module 3: Building a Business Hint Which cost will vary depending on how much lemonade you sell, and which cost will remain the same? Either drag each item to the appropriate area or select Give me the answer, then click the Submit button. 3 3 Revenue (Income) Straws - Costs Variable Product Warranty Freight Warehousing Other costs of sales Multi. Colored Straws Straw dispenser Give me the answer. Fixed Product Warranty Warehousing Engineering Other costs of sales Profit (Margin) X Your Score
Profitability 101 Module 3: Building a Business Here’s Your Answer! Multi. Colored Straws The straws are a variable cost because you need more if you sell more lemonade, and you “use up” the resource when you sell your product. You have the dispenser whether or not you sell any lemonade, so its cost is a fixed cost. 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Other costs of sales Fixed Product Warranty Warehousing Engineering Other costs of sales Profit (Margin) Straws Straw dispenser X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! Multi. Colored Straws The straws are a variable cost because you need more if you sell more lemonade, and you “use up” the resource when you sell your product. You have the dispenser whether or not you sell any lemonade, so its cost is a fixed cost. 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Other Costs of Sales Fixed Product Warranty Warehousing Engineering Other Costs of Sales Profit (Margin) Straws Straw dispenser X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s Incorrect. You dragged at least some items to the incorrect location. The correct placement is shown. Multi. Colored Straws The straws are a variable cost because you need more if you sell more lemonade, and you “use up” the resource when you sell your product. You have the dispenser whether or not you sell any lemonade, so its cost is a fixed cost. 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Other Costs of Sales Fixed Product Warranty Warehousing Engineering Other Costs of Sales Profit (Margin) Straws Straw dispenser X Your Score
Profitability 101 Module 3: Building a Business 3 3 Advertising Costs To help you grow, you negotiate an ongoing contract to supply The Cool Spot® with batches of your lemonade. The Cool Spot wants to advertise its offerings, and you want The Cool Spot to advertise YOUR lemonade. at The ot Cool Sp
Profitability 101 Module 3: Building a Business Let’s Make A Deal You make a deal with The Cool Spot®: you provide the sign and split the cost of the person who carries the sign around. You and the Cool Spot® have a contract with a sign carrier who gets paid $10 per hour and works three hours each day. 3 3 With your advertising arrangement, do you incur: Variable costs only? Fixed costs only? Both? With this arrangement do you incur fixed costs only, variable costs only, or both? Give me a hint. Make a selection, then click the Submit button to check your answer. Give me the answer.
Profitability 101 Module 3: Building a Business Hint The cost of the sign and the cost for paying the sign carrier does not depend on the number of glasses of lemonade you make or sell. Make a selection, then click the Submit button to check your answer. 3 3 With your advertising arrangement, do you incur: Variable costs only? Fixed costs only? Both? Give me the answer.
Profitability 101 Module 3: Building a Business Here’s Your Answer! The amount you pay for the sign and for the sign carrier is the same regardless of the amount of lemonade you sell. Therefore, all of these costs are fixed costs. 3 3 With your advertising arrangement, do you incur: Variable costs only? √ Fixed costs only? Both? X Your Score
Profitability 101 Module 3: Building a Business That’s Correct! The amount you pay for the sign and for the sign carrier is the same regardless of the amount of lemonade you sell. Therefore, all of these costs are fixed costs. 3 3 With your advertising arrangement, do you incur: Variable costs only? √ Fixed costs only? Both? X Your Score
Profitability 101 Module 3: Building a Business Sorry. That’s Incorrect. The amount you pay for the sign and for the sign carrier is the same regardless of the amount of lemonade you sell. Therefore, all of these costs are fixed costs. 3 3 With your advertising arrangement, do you incur: √ Variable costs only? Fixed costs only? Both? X Your Score
Profitability 101 Module 3: Building a Business Complete Your P&L Add your last cost of producing your lemonade and bringing it to market. Categorize these advertising expenditures as “Sales General and Administrative, ” or “SG&A. ” You now have at least one entry in every category you use to record costs. 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Other Costs of Sales Click on each term to see an expanded view with details of each variable and fixed cost. Fixed Product Warranty Warehousing Engineering Other Costs of Sales SG&A Profit (Margin) Sign Carrier X Your Score
Profitability 101 Module 3: Building a Business 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Other Costs of Lemons Sugar Water Ice Labor Sales Fixed Product Warranty Warehousing Engineering Other Costs of Sales SG&A Profit (Margin)
Profitability 101 Module 3: Building a Business 3 3 Revenue (Income) - Costs Claims Variable Product Warranty Freight Warehousing Other Costs of Sales Fixed Product Warranty Warehousing Engineering Other Costs of Sales SG&A Profit (Margin)
Profitability 101 Module 3: Building a Business 3 3 Revenue (Income) No sub items for freight. - Costs Variable Product Warranty Freight Warehousing Mom’s refrigerator Other Costs of Sales Fixed Product Warranty Warehousing Engineering Other Costs of Sales SG&A Profit (Margin)
Profitability 101 Module 3: Building a Business 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Other Costs of Sales Fixed Product Warranty Warehousing Engineering Other Costs of Sales SG&A Profit (Margin) Straws
Profitability 101 Module 3: Building a Business 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Other Costs of Sales Spoon Pitcher Fixed Product Warranty Warehousing Engineering Other Costs of Sales SG&A Profit (Margin)
Profitability 101 Module 3: Building a Business 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Other Costs of Sales Computer Fixed Tracking Software Product Warranty Cards Warranty Warehousing Engineering Other Costs of Sales SG&A Profit (Margin)
Profitability 101 Module 3: Building a Business 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Other Costs of Sales Fixed Product Warranty Warehousing Engineering Other Costs of Sales SG&A Profit (Margin) Mini-refrigerator
Profitability 101 Module 3: Building a Business 3 3 Revenue (Income) No sub items for Engineering - Costs Variable Product Warranty Freight Warehousing Other Costs of Sales Fixed Product Warranty Warehousing Engineering Other Costs of Sales SG&A Profit (Margin) Straw dispenser
Profitability 101 Module 3: Building a Business 3 3 Revenue (Income) - Costs Variable Product Warranty Freight Warehousing Other Costs of Sales Fixed Product Warranty Warehousing Engineering Other Costs of Sales SG&A Profit (Margin) Sign Carrier
Profitability 101 Module 3: Building a Business 3 3 Congratulations You have completed the Lemonade Game. Your final score indicates that you understand fixed and variable costs. Your Final Score: X The maximum total points available is 40. If the cut off is 90 percent, then the user gets this for score of 36 or more.
Profitability 101 Module 3: Building a Business 3 3 Try Again? You have completed The Lemonade Game. Your final score indicates that you could improve your understanding of fixed and variable costs. Maybe you should play the game again. Your Final Score: X The maximum total points available is 40. If the cut off is 90 percent, then the user gets this for score of 35 or less.
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