new business module

96
BUSINESS SKILLS
Berthe’s tearoom – case study, part 4 (see Hand-out 39)
Berthe decided that she wanted to know how much profit she was making from each beverage.
She decided to determine the profit margins of her two products in order to better understand
her business.
She collected the following information:
• Estimated yearly tea sales:
9 months x 640 cups + 2 months x 1,280 cups = 8,320 cups of tea
• Direct costs per cup of tea = $0.10
• Estimated yearly juice sales:
9 months x 160 bottles + 2 months x 320 bottles
9 months x 1,000 bottles + 2 months x 2,000 bottles = 15,080 bottles of juice
• Direct costs per beer bottle = $5
• Annual indirect costs = $59,880
• Annual depreciation = $2,000
Berthe decided that she would spread the indirect costs evenly over the beverages sold:
• Beverages sold: (8,320 cups of tea + 15,080 juice bottles) = 23,400 beverages
• Indirect cost per beverage: $59,880 / 23,400 beverages = $2.56 per beverage
Berthe decided that she would spread the depreciation evenly over the bottles of juice sold, as
the tea did not need refrigeration:
• Annual depreciation per bottle: $2,000 / 15,080 bottles = $0.13 per bottle
Berthe calculated the following total costs per beverage:
• Total cost tea/cup: $0.10 direct costs + $2.56 indirect costs = $2.66
• Total cost juice/bottle:
$5 direct costs + $2.56 indirect costs + $0.13 depreciation = $7.69
This meant her profit margins were:
• Tea/cup: $2 sales price – $2.66 total costs
= $–0.66 per cup
This meant that the price Berthe had set for a cup of tea did not cover the total costs as
she had attributed them. Although the price was high enough to cover the direct costs
of $0.10, it was not high enough to cover the indirect costs of $2.56.
It is important to note that the tea sales still contributed to the financial success of
Berthe’s tearoom, because they helped cover some of the indirect costs.
• Juice/bottle consumed in the tearoom:
$10 sales price – $7.69 total costs = $2.31 per bottle
• Juice/bottle sold over the counter:
$9 sales price – $7.69 total costs = $1.31 per bottle
This meant that each bottle of juice sold in the tearoom or over the counter covered its direct
costs ($5) plus the attributed share of indirect costs and depreciation ($2.69).
In general, the sales price for a product should cover more than
its direct costs, otherwise the business loses money with each
unit sold. Entrepreneurs therefore have to stop production