SLC | S21W6 | Costs for entrepreneurs - Cost structure.

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It is always a joy for me whenever I have the opportunity to participate in the Steemit contest weekly and today I will be participating in the crypto academy community contest. Stay tune below.

What is a Cost Structure?

With the little understanding I got from the lecture, I will like to say that a cosy structure talks about a structure that contains all the necessary expenses which a business will need to deliver their products or their services also. When we talk about cost structure, it involves costs like the fixed costs, the variable costs and many more. There is a high need for us to understand the cost structure of a business because it goes a long way to actually determine the rate of profitability in that business.

Importance of Cost Structure for Entrepreneurship

There are lots of importance or benefits that cost structure offers which I would like to quickly talk about.

• Budget Planning and Financial Management: Cost structure goes a long way to help businesses owners to know the resources they should allocate and not only that helps them to draft out budget efficiently without overspending. It helps to always give this step by step expenses for the long term investment needed in the business.

• Pricing Strategy Development: As a business owner who either sells products or better still services, I will say ir helps you to kmow the type of price to allocate for the products you sell and the service's you render. In business, they call it break even.

• Profitability Analysis: Like I said earlier, cost structure goes a long way to determine your profitability in your business. It can help you to know which part of your business to cut down the expenses and which products or services to pay attention to for more profitability.

• Investor Confidence: Cost Structure goes a long way to help increase the confidence of investors for your business because it gives your business this financial dynamic that helps foster transparency which can help you to attract investors for funding.

• Risk Management: Cost structure goes a long way to help you manage risk effectively in your business. With adequate cost structure, it helps you to know which risk to take and which risk not to take as it were.

• Scalability and Growth Planning: Then lastly, it helps you to know which area of your business to focus on for your business growth. This can help foster scaling operations which can help maintain cost efficiency.

1. Fixed Cost-Oriented Businesses

• Example : Gym Facilities

There are businesses that focus on fixed cost oriented structure and this helps them to focus much more on their investments so that they will be able to allocate their resources effectively. An example of the business that follows this structure is the gym facilities because gyms actually invest so much of their money in their equipment and generally utilities.

2. Variable Cost-Oriented Businesses

• Example : Food Delivery Services (e.g., DoorDash)

The second method of cost structure I will like to talk about is the variable cost oriented businesses. In this type, they make use of commisons to draw out their variable costs. One perfect example I can make use of are food delivery services whose cost increases per time based on their service delivery.

3. Value-Driven Cost Structure

• Example : Tesla

We have the value driven cost structure and they make use of something called the value driven approach to help offer quality in premium level so that their user can have a very unique and quality experience even though it might come at a very higher cost. A perfect example for this is the Tesla company. If you will notice, Tesla always focuses on quality and durability even though it might come at a very high cost.

4. Cost-Driven Cost Structure

• Example : Dollar Tree

The next one is the cost driven cost structure and in this aspect ,they specialise on reducing the expenses that it takes to deliver products and services to the lowest possible rate. A perfect example that I can make use for this cost structure is the Dollar tree. This might be the first time many of us might be hearing about it. They helped to make sure that a cosy driven structure is achieved so that products can be sold at a very low price.

5. Scalable Cost Structure

• Example : Spotify

This is the last one I will talk about. In the scalable cost structure, they make use of the customer number increments to determine their Profitability. A perfect example is Spotify.

There are a whole lot of elements of a cost structure that we need to pay attention to which I would like to list out below;

1. Fixed Costs

Of course this will be the first. We have the fixed cost and in this type of cost, it always remains constant and does not change. This is one of the most important elements of the cost structure.

Example.

• Salaries: Salaries are the perfect example of a fixed cost because it is fixed whether the business performs or not. You will still need to pay your staff in your business.

2. Variable Costs

The other major element I will like to talk about is the variable costs. When it comes to the variable cost, it can actually fluctuate as it is not fixed or let me say constant as the fixed cost.

Example.

• Utilities: A perfect example of variable cost is the utilities. They make use of the electricity usage of the user to determine the cost. With this, it is variable.

3. Semi-Variable Costs

We have something called the semi variable costs. This is also one of the most important elements of cost structure. In this type of coast, it can be fixed and it can vary depending on the other external factors.

Example.

• Maintenance: A perfect example of the semi variable cost is the maintenance cost. Sometimes it can vary and sometimes it can be fixed based on how those equipment are used.

4. Economies of Scale

This is the last one I will like to talk about. We have something called the economies of scale and in this aspect, it makes use of costs that decrease based on the volume of production per time.

Examples.

• Manufacturing: The example of this type of economies of scale is the manufacturing cost. In manufacturing cost, it goes a long way to be determined by the volume of production made.

Alright for this calculation, I will be making below these;

These are the data given;

• Daily Production: 5 Cakes per day

• Total Margin Goal = 25%

After listing out the two major data we are given, one of the things I will do is to calculate the Fixed Costs, the variable costs also which are below;

1. Fixed Costs.

Like I said earlier, fixed cost means those costs did not change. They are always constant irrespective of the number of cakes that are made.

2. Variable Costs

Now I will move to calculate the variable costs just like I said and this involves those costs that are subjected to change based on the number of the cakes that are always produced.

Then for me to find out the Daily Variable costs, I will need to multiply the total variable costs by the number of the cake which is 5.

Daily Variable Costs: $55 × 5 cakes = $275

3. Total Costs

Then what is next for me is to calculate the Total costs as it were, given I have been able to find out both the variable and the fixed cost, it will be easy for me to find out the total costs.

• Total Fixed Costs = $140

• Total Variable Costs: $275

• Total Costs: $140 (fixed) + $275 (variable) = $415

4. Revenue Calculation

After getting the total costs for both the fixed and the variable and for me to also find the revenue calculation, I will need to apply the 25% profit margin that i was given earlier.

To achieve a 25% profit margin, the selling price per cake must be calculated:

• Selling Price per Cake = Total Costs + Desired Profit / Number of Cakes Produced

To find the desired Costs = 25% of total costs

• 0.25 × 415 = 103.75

Then to find the selling price per cake, it will be = 415 + 103.75 / 5 = $103.75

5. Final Cost Structure Summary

Therefore, for the cake business, each cake must be sold at $103.75 so that the 25% profit margin given must be achieved.

Thank you for this lecture, looking forward to more interesting and benefiting lectures in the more weeks to come

I invite @josepha , @newekemini5 and @okere-blessing to drop a very constructive comments on this post and also to participate in this contest.