Lesson 5 of 6Designing and Refining an Idea

Unit 2 · Lesson 5 of 6

Making a Simple Budget

A simple budget separates one-time start-up costs from the cost per item, then uses revenue = price × number sold and profit = revenue − total costs to see whether the idea makes money and how many items cover the start-up costs.

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Key things to remember

1Start-up costs are paid once, before the first sale. Cost per item is paid for every item made.
2Revenue = price × number sold.
3Total costs = start-up costs + (cost per item × number sold).
4Profit = revenue − total costs. A negative profit is a loss.
5Number to sell to cover start-up = start-up costs ÷ (price − cost per item). Always round up.

Before Priya and Sam order 100 stickers, they want to know one thing: will this make money or lose money? A budget is a plan that shows the money you expect to come in and go out. Making one before you spend anything protects you from nasty surprises. It only uses adding, subtracting, multiplying and dividing.

Start-up costs and cost per item

AStart-up costs (paid once)

Money you spend before your first sale.
You pay it once, no matter how many you sell.
Stick With It: sample batch $20, display board and sign $25, cash box $20.
Total: $$20 + $25 + $20 = $65$ .

BCost per item (paid for each one)

Money you spend to make each item you sell.
Sell more, and these costs grow.
Stick With It: printing $0.75 plus a paper sleeve $0.25 per sticker.
Total: $$0.75 + $0.25 = $1.00$ per sticker.

Fig 1A simple start-up budget: start-up costs, cost per item, price, and profit.

Revenue, total costs and profit

Revenue is all the money that comes in from sales. Total costs are the start-up costs plus the cost of every item you make. Profit is what is left after you pay all the costs. If profit is negative, it is called a loss.

Revenue = price \times number sold

Total costs = start-up + (cost per item \times number sold)

Profit = revenue - total costs

Budget line	Calculation	Amount
Revenue: stickers sold	100 × $3.00	$300.00
Start-up: sample batch	one time	$20.00
Start-up: display board and sign	one time	$25.00
Start-up: cash box	one time	$20.00
Total start-up costs	$20 + $25 + $20	$65.00
Printing	100 × $0.75	$75.00
Paper sleeves	100 × $0.25	$25.00
Total cost of items	$75 + $25	$100.00
Total costs	$65 + $100	$165.00
Profit	$300 − $165	$135.00

Stick With It budget for the first month, planning to sell 100 stickers at $3.00 each.

How many to sell to cover start-up costs

Each sticker sells for $3.00 and costs $1.00 to make, so each one leaves $$3.00 - $1.00 = $2.00$ to pay back the start-up costs. To find how many stickers cover the $65 start-up, divide: $$65 \div $2.00 = 32.5$ . You cannot sell half a sticker, and 32 stickers would only cover $32 \times $2 = $64$ , which is $1 short. So you always round up: 33 stickers. This number is called the break-even point: the sales where you neither make nor lose money overall.

Number to sell = \frac{start-up costs}{price - cost per item}

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The break-even lab shows how many you need to sell. Fixed costs means start-up costs and variable cost means cost per item. Try price 3, variable cost 1 and fixed costs 65.

VideoThe video calls this the break-even point. The amount each sale adds after its own costs is the same idea as this lesson's profit per item, used to work out how many to sell to cover your costs.Watch on YouTube

When the budget shows a loss

What if Priya and Sam only sell 25 stickers in a slow first two weeks? Revenue is $25 \times $3.00 = $75.00$ . Total costs are $$65 + 25 \times $1.00 = $90.00$ . Profit is $$75 - $90 = - $15.00$ , a loss of $15. A loss in a budget is useful news: it tells you to change the plan before you lose real money.

Sell more: find more places or times to sell, or sell online to friends and family.
Raise the price a little, if customers still see it as fair.
Cut the cost per item: find a cheaper supplier or a cheaper package.
Cut start-up costs: borrow a display board or use a box you already own.
Offer bundles, such as 3 stickers for one price, so each customer buys more.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1

Stick With It plans to sell 100 stickers at $3.00 each. Start-up costs are $65. Each sticker costs $1.00 to make. Find the revenue, total costs and profit.

Example 2

How many stickers must Stick With It sell to cover its $65 start-up costs?

Example 3

In a slow first two weeks, Stick With It sells only 25 stickers. Find the profit or loss, then test one fix: raising the price to $4.00 for the same 25 sales.

Example 4

A study snack box costs $3.50 to fill and sells for $6.00. Start-up costs are $40. How many boxes cover the start-up costs, and what is the profit if 30 boxes sell?

Where marks get lost

Forgetting the start-up costs and only subtracting the cost per item, which makes profit look too big.
Multiplying start-up costs by the number sold. Start-up costs are paid only once.
Rounding down the number to sell (32 instead of 33), which leaves you a little short.
Calling revenue 'profit'. Revenue is all the money in; profit is what is left after costs.
Seeing a loss in the budget and giving up, instead of changing the price, costs or sales plan.

Flashcards 7

Budget

Start-up costs

Cost per item

Revenue

+ 3 more

Practice

Stick With It sells 45 stickers at $3.00 each. What is the revenue, to the nearest cent?

Stick With It has $65 in start-up costs and each sticker costs $1.00 to make. What are the total costs for 80 stickers, to the nearest cent?

Stick With It sells 60 stickers at $3.00. Start-up costs are $65 and each sticker costs $1.00. What is the profit, to the nearest cent?

A bracelet sells for $2.50 and costs $1.00 to make. Start-up costs are $70. How many bracelets must be sold to cover the start-up costs? (Give a whole number.)

A snack box venture has $40 in start-up costs. Each box costs $3.50 and sells for $6.00. Only 12 boxes sell. What is the profit, to the nearest cent? (Use a negative number for a loss.)

Match each Stick With It cost to its type.

Cash box

Printing each sticker

Display board and sign

Paper sleeve for each sticker

A budget shows a loss. Which is NOT a sensible fix?

The calculation gives 32.5 stickers to cover start-up costs. What is the answer?

Put the steps for finding profit in order.

1Find the cost of items: cost per item × number sold
2Find profit: revenue − total costs
3Find total costs: start-up + cost of items
4Find revenue: price × number sold

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