SLC | S21W6 | Costs for entrepreneurs - Cost structure.
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Am super happy to be part of this week's class, I went through the lesson and saw a need to be part of this week's task. I've been away for quite some time now because of my many engagements but am happy I got an opportunity to put in my entry for this week. Without taking much of your time, let me delve into the lesson for today.
What is a cost structure, and what is its importance for entrepreneurship?
I would love to define cost structure in my own layman term and I hope I really communicate this term in the best way possible. I will like to breakdown the definition into two parts, which is cost and structure. Let's start by talking about the latter, structure which is a well organized approach or plan which makes things more trackable, accountable and solid. Cost on the other hand talks about the money or value or resources that goes into something valuable.
Putting both together means an organized approach to ascertaning cost in such a way that cost can be identified, classified, accounted for and also make it possible for decisions to be made based on these structure. No doubt, cost structure is seen as the framework of every financial strategy as it helps in making profound decisions.
• Maximization of Available resources: Appropriate cost structure help to put available resources into proper use and it doesn't matter what resource it is, it can be financial, human or material resources.
• Informed Decision Making: a good cost structure can help organizations or business entrepreneurs make informed decisions that can help grow their business both in the present and future.
• Profitability: It helps business owners sustain their business profitably and keep their business running. A good cost structure would basically save business from bankruptcy and insolvency.
Provide examples of businesses that use the cost structure methods explained; explain your answers.
There are quite a number of businesses that maintain the major types of cost structure we've got and am going to be talking about some of these businesses in line with the major cost structure we have.According to the lesson, we have the cost driven structure and the value driven cost structure
Cost driven businesses focus on low-cost products and service, their main goal and objectives is to offer products and services that are very affordable and less expensive and they do this by applying all manner of cost-saving techniques. Businesses that are into food and beverages are captured in this model i.e Pepsi, coca-cola, Chicken Republic etc.
Value driven cost models focus on offering value to their customers who of course are after value as well and not some cheap commodities. They aim at giving their customers value for what they are spending on and this in most cases makes their products or service a bit more expensive than other regular products that are mainly cost driven.
The businesses you would find here are businesses that are into luxury products or services, who have built names for themselves and have gained a reputation based on their expertise and experience. These kinds would not natural embrace the cost driven models, they are after value. Examples include brands like GUCCI, ZARA, ADDIDAS etc.
What are the elements of a cost structure? Provide examples,
In this section, we shall be talking about the elements of a cost structure. Below are the list of these elements.
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• Fixed cost: These are cost that are fixed in nature, they can also be referred to as constant cost as they remain unchanged even over an extended period of years. Examples of such include Rent, equipment, land, machinery etc.
• Variable cost: These are costs that can change, they are not fixed in nature and of course they vary. Conditions can make them change from time to time. Conditions such as volume of sale, or production input can influence this kind of cost. Examples of these costs include, raw material, transit cost etc.
• Semi-Variable cost: These are costs that have the elements of both fixed and variable cost. They include utility bills, sales commission, etc
• Direct Cost: These are costs that are directly related to the production process. They include, direct labour, material, sales commission, manufacturing supplies etc.
• Indirect cost:These are costs that are not directly traceable to the production process. They include, rent utilities, office expenses, distribution cost, transportation etc.
Prepare the cost structure of a business dedicated to making cakes. It has a production of 5 cakes per day and expects to obtain a total profit margin of 25%.
Cost Structure For Cake Making
Production - 5 cakes/day
Profit margin - 25%
Cost structure component (Fixed & Variable costs)
• Variable Costs Per Cake
Ingredients - $10
Packaging - $3
Utilities - $2
Labor direct - $5
Total - $20
• Fixed cost
Rent/lease - $550
Utilities - $100
Depreciation/Maintenance - $50
Marketing and Branding - $150
Admin Expenses | $50
**Total = $900
• Production Volume
According to the tasked our daily production is 5 cakes per day. To sum it up in months we would calculate it with the follow below.
5 cakes (per day) x 30 = 150
The above calculation will be valid for shops that operates 24/7.
5 cakes (per day) x 25 = 125
This calculation is valued for every typical shops that doesn't run on weekends. This is the calculation I will be using for my task.
• Pricing Strategy using 25% profit margin
We would first determine our total monthly cost which is the sum of fixed and variable cost.
Variable cost - $20/cake x 125 = $2500
Fixed cost (constant) = $900
Total Cost = $3400
To Calculate our intending Revenue the formula below will be adopted.
Total cost ÷ (1 - profit Margin)
$3400 ÷ (1 - 25%)
$3400 ÷ (1 - 25/100)
$3400 ÷ (1 - 0.25)
**$3400 ÷ 0.75 = $4533 **
Cost Per cake will then be calculate with the formula below.
Revenue ÷ Monthly Production
$4533 ÷ 125 = $36.264
Therefore, cost per cake can be approximated to be $36.
To ascertain our Monthly Profit the following calculation below will be used.
Revenue - Total cost
$4533 - $3400 = $1133
This brings me to the end of this homework task. I would like to invite
@m-fdo, @sur-riti @radleking
Regards
@lhorgic❤️