The Building Blocks of Business

1
The Building Blocks of Business

• Chapter 2
• The Economics of One Unit of Sale

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Chapter 2 Objectives

• Define a unit of sale for a business
• Describe the four types of business
• Analyze the economics of one unit for each type
  of business, and calculate gross profit per unit

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Economics of One Unit of Sale

• Entrepreneurs use profits to
• Pay themselves
• Expand their businesses
• Start other businesses
• For this reason, Entrepreneurs must know what
  their gross profit is, which is done through the
  economics of one unit of sale (EOU)

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Economics of One Unit of Sale

• Unit of Sale one unit of the product or service
  a business sells
• One unit depends on the business
• Retail One unit or item
• Abercrombie Fitch One shirt
• Manufacturing One order
• Mazak Corporation One machine

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Economics of One Unit of Sale

• Service One hour of service time or a standard
  block of time devoted to a task
• VonLehman and Company one hour of accounting
  work
• Wholesale Multiple of same item
• Sams Club one box of MMs
• Combination Average sale per customer minus
  average cost of goods sold per customer
• Skyline Chili 3 Cheese Coneys, 1 large Pepsi

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Cost of Goods Sold for One Unit

• Cost of Goods Sold (COGS)
• Definition the cost of selling one additional
  unit
• Easier definition the price a company pays for
  each good/service they sell
• Example Finish Line pays 90.00 for a pair of
  Air Jordan basketball shoes. Their COGS is
  90.00.

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Cost of Goods Sold for One Unit

• Gross Profit per Unit how much money a company
  makes after COGS are covered
• Example Finish Line COGS on Air Jordans is
  90.00
• Finish Line sells Jordans to consumers for
  150.00 per pair.
• Gross Profit per Unit is
• Selling Price COGS Gross Profit
• 150 - 90 60.00

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Cost of Goods Sold for One Unit

• Total Gross Profit Total Revenue Total COGS
• Finish Line orders 50 pair of Jordans
• 50 x 90.00 4,500.00 (Total COGS)
• Finish Line sells all 50 pair at 150 each
• 50 x 150 7,500 (Total Revenue)
• Finish Lines gross profit is?
• 7,500 - 4,500 3,000 (Total Gross Profit)

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Economics of One Unit of Sale

• If one unit of sale is profitable, the whole
  business can be profitable
• If one unit of sale is not profitable, then a
  business will never be profitable, no matter how
  many units are sold
• Economics of one unit price of the unit minus
  the cost of goods or services sold

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The Four Types of Businesses

• Manufacturing makes a tangible product
• Wholesale buy products in large quantities from
  manufacturers then sell products in smaller
  quantities to retailers
• Retail Sell one product at a time to consumers
• Service provides an intangible product

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The Cost of Labor in the EOU

• Cost of labor must be included in COGS
• Why?
• The person/people who make the product or provide
  a service must be paid
• If labor is not accounted for, gross profits will
  be overstated
• If the entrepreneur is doing the work, paying
  labor is a reward for working
• Gross profit is a reward for the business

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Going for Volume

• As a business becomes successful, the
  entrepreneur will not be able to do all the work
  alone
• Bigger orders require more employees
• Even though you may pay more in labor and
  decrease gross profit per unit, you increase the
  chance of making larger total profits

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Entrepreneurs should

• Calculate the unit of sale
• Determine the EOU of sale
• Substitute your labor with someone elses labor
• Try to sell in large volumes
• Create jobs and operate at a profit
• By doing so you will . . .

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Become a Business Leader

• Promote yourself to being a leader of the
  business
• Let others do the work while you grow the
  business
• Letting others do the work creates jobs and helps
  the economy
• It also allows you to have time to recharge
  yourself and avoid working too many hours
• Remember to enjoy what you do!!!

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Chapter 2 Objectives

• Define a unit of sale for a business
• Describe the four types of business
• Analyze the economics of one unit for each type
  of business, and calculate gross profit per unit