Looking Closely At Cost And Competition Watch This Video

Looking Closely At Cost And Competitionwatch This Videorevenues Pro

Looking closely at cost and competition watch this video (revenues, profits, and price) to help you prepare for this week’s discussion: reply to these prompts using the company for which you currently work, a business with which you’re familiar, or the dream business you want to start. What are some key fixed and variable costs for this business? Remember, fixed costs do not change when output changes. That is, fixed costs remain even if the company is producing nothing. Variable costs increase as output increases.

Paper For Above instruction

Understanding the cost structure of a business is fundamental to managing profitability and strategic planning. In this paper, I will analyze the fixed and variable costs associated with a mid-sized coffee shop, a business I am familiar with, to illustrate the distinctions and their implications for business operations.

Fixed Costs in a Coffee Shop

Fixed costs are expenses that remain constant regardless of the level of production or sales volume. For a coffee shop, key fixed costs include rent, insurance, salaries of full-time managerial staff, and licensing fees. Rent is often the largest fixed expense, typically paid monthly and unaffected by daily fluctuations in customer traffic or sales volume. Insurance costs, including liability and property insurance, are regular fixed expenses that protect the business from unforeseen events. Salaries of managerial staff, such as the store manager or administrative personnel, are fixed because they are paid consistently regardless of how many customers are served each day. Licensing fees, including health permits and business licenses, are fixed costs due to their regular renewal schedules.

Variable Costs in a Coffee Shop

Variable costs fluctuate directly with the level of output or sales volume. For the coffee shop, primary variable costs include coffee beans, milk, sugar, cups, lids, stirrers, and other consumables. These costs increase proportionally with the number of coffees and beverages sold. For example, the more coffees sold, the more coffee beans and cups are consumed, directly impacting the total variable costs. Labor costs also include hourly wages for baristas and kitchen staff, which can be considered semi-variable; however, for simplicity, they are often categorized as variable costs because they fluctuate with hours worked, which in turn depends on sales volume. Additionally, utility costs such as electricity and water are partly variable, increasing with higher activity levels but also containing a fixed component necessary to keep the business operational regardless of sales.

Implications of Fixed and Variable Costs

Understanding these cost distinctions allows the coffee shop management to better forecast profitability and manage operational risks. For example, during off-peak hours or seasons, the shop might experience reduced sales, but fixed costs like rent and salaries persist, impacting overall profitability. Conversely, during peak times, increased sales cover variable costs and contribute more significantly to profits.

Pricing strategies also depend on this understanding; knowing the variable costs per unit helps set minimum pricing to cover costs, while fixed costs inform the long-term pricing and sales targets needed for profitability. Moreover, controlling variable costs such as waste management or negotiating better supplier deals can improve margins.

Conclusion

Distinguishing between fixed and variable costs is essential for effective business management. Fixed costs provide stability but require consistent revenue streams to sustain. Variable costs directly affect the margins and operational flexibility of a business. In the context of a coffee shop, carefully managing these costs enables better financial planning, pricing, and strategic decisions. Ultimately, understanding these costs helps entrepreneurs and managers make informed decisions that can enhance profitability and ensure sustainable growth.

References

1. Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.

2. Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost Accounting: A Managerial Emphasis. Pearson.

3. Hill, N. (2010). The Restaurant Manager's Handbook: How to Set Up, Operate, and Manage a Financially Successful Food Service Operations. Atlantic Publishing.

4. Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.

5. Bhattacharyya, S. K. (2011). Cost Accounting for Managers. PHI Learning.

6. Kasavana, M., & Smith, C. (2013). Management of Restaurant Operations. Educational Institute of the American Hotel & Lodging Association.

7. Tuttle, C. (2017). Starting and Managing a Coffee Shop Business. Entrepreneur Press.

8. Small Business Administration. (2023). Working with Fixed and Variable Costs. SBA.gov.

9. Krajewski, L. J., Malhotra, M. K., & Ritzman, L. P. (2013). Operations Management: Processes and Supply Chains. Pearson.

10. Manrodt, K., & Mukherjee, K. (2015). Cost Management Strategies for Small Business Success. Routledge.