Fixed Costs in the Weekly
Decision Period Biz Cafe
Ted Mitchell
Fixed Costs in Biz-Cafe
• Rent is fixed for every decision period (month) and and is
NOT a discretionary cost (it can NOT be changed)
• Managers and Servers is defined as a Discretionary Fixed
Cost (it can be changed)
• Advertising and Radio is defined as a Discretionary Fixed
Cost (it can be changed at the beginning of each week))
• Discretionary Cost (you can change the cost by changing
the number of servers or changing the wages)
• It is a fixed cost for the decision period (does not change
during the week and does not vary directly with changes in
the sales volume, Q)
Fixed Costs do NOT Change
for the time period
Dollars
Rent
Advertising
Salaries
Number of Servers
Number of Radio Spots
Quantity of Coffee Sold
Variable Costs and Fixed Costs
Dollars
Fixed
Cost
Total
Variable
Cost
Quantity of coffee sold
You have to know the Difference
•
•
•
•
•
•
Between a
1) Fixed Cost for the decision period
And a
2) Variable Cost for the decision period
Cost of Goods Sold is the Total Variable Cost
Direct cost of making a single cup of coffee is
the variable cost per cup, V
Weekly Report on Marketing
Performance
Week #1
Revenue, R = P x Q
$3.50 x 1069 cups
$3,741.50
Cost of Goods sold, V x Q
$0.32 x 1069
Total variable Cost
Gross Profit, G = (P-V) x Q
$3.18 x 1069
$3,399.42
Servers
Fixed Marketing Cost
=$342.08
$1,741.50
Adv & promotion
Fixed Marketing Cost
$2,800.00
Total Fixed Marketing Cost
= $4,541.50
Marketing’s Contribution
($1,142.08)
to Weekly Profit
Calculating the the direct cost for making a cup of coffee
(aka variable cost per cup, V)
Servers are
•
•
•
•
Part of the Product/Service mix
Once selected they are a fixed cost for week
Need to have sufficient numbers each working
Recommend wages for 10 hrs per week at
$10 per hour = $100 a week per server
• Recommend starting with 20 servers
• And 3 managers at $250 a week
You will choose something for
• All Four P’s of the marketing mix
• Recommend a Staring Price of $3.50
• Recommend the $6 coffee to start with for
Product
• And 20 servers for Service Quality
• Promotion
• Hours of Operation (Place)
How much to Spend on
Advertising and Promotions?
Ted Mitchell
How much to spend on advertising?
• The Affordable Method is the most you can
afford to spend after you decide on how what
a normal profit is
• Assume you believe a normal net profit is
$2,500 a week
If we need profit = $2,523 then we can
afford to spend $2,000 on advertising
Weekly Estimated
Revenue, R
2436 cups x $3.50
$8,527
COGS, Total Variable Costs
2436 cups x $0.282
Per cup of Best Coffee
$687
Gross Profit, G = R- COGS
(P-V) = $3,22
$7,840
Servers and managers
20 servers x $100 ea
3 man x 250 = 750
$2,750
Advertising
Afford to spend
$4,523 – $2,423
$2,000
Inescapable Weekly
Overhead expense
(conservative)
Approximating profit with
advertising
$667
Need $2,423 to keep the
shareholders happy
$2,423
How much to spend on advertising?
• The Objective-Task Method is spend enough
to create an adequate awareness level
• The goal of advertising is to create awareness
of the cafe among potential customers
• If you are zero awareness spend lots of $
• If you are 90% awareness then spend zero $
To get the business up and running
• You need to spend more than $4,523 in the
first few weeks on advertising
• And accept a weekly loss for the first few
weeks
You need to know Customer
Awareness level
• You have to Buy the Professional Market
Study to get the market’s awareness level
• Be sure to buy it!
• The awareness will grow without advertising
but it grows very, very slowly!
You will choose something for
• All Four P’s of the marketing mix
• Recommend a Staring Price of $3.50
• Recommend the $6 coffee and 20 servers to
start with for Product/Service Quality
• Recommend general awareness advertising
and 10 radio spots in the first week for
Promotion
• Hours of Operation (Place)
What Place Decisions?
Ted Mitchell
You have
• Three strategic place decisions
1) the location in the town
• 2) The type of furnishings
• 3) The weekly decision as to the number of
days and hours to stay open
• What does it cost to stay open an additional
hour?
You will choose something for
• All Four P’s of the marketing mix
• Recommend a Staring Price of $3.50
• Recommend the $6 coffee and 20 servers to
start with for Product/Service Quality
• Recommend general awareness advertising
and 10 radio spots in the first week for
Promotion
• Recommend open on the weekends and start
with 70 Store Hours of Operation (Place)
This is NOT an optimal decision set for
the first week
• Price Tag: of $3.50 for medium cup
• Product and Service $6 coffee and 20 servers
• Promotion: general awareness advertising
and 10 radio spots
• Place and Time: 70 Store Hours of Operation
• This a reasonable decision for the first week
• It is NOT a good decision for week 4!
Start Exploring the
• Consequences of Changing ONE Marketing Input
at a time.
• Do NOT Try to change two or more things at a
time.
• When exploring the practice games be
systematic. Deal with the most strategic elements
of marketing activities first.
• Remember the practice game is to help you
prepare a strategy for playing the ‘Single-Shot’
game
To earn the points
in a Practice game
• You must finish the game on the last decision
period (week) specified for that particular
game
• Usually on 16th or 8th week of the simulated
decisions
• Keep making decision until the computer will
not let you advance any further
Any Questions?
• about where to start with the 4P’s in week #0
of the simulation game.