Cupcake economics 2 | Inflation | Finance & Capital Markets | Khan Academy

ruticker 08.03.2025 21:05:03

Recognized text from YouScriptor channel Khan Academy

Recognized from a YouTube video by YouScriptor.com, For more details, follow the link Cupcake economics 2 | Inflation | Finance & Capital Markets | Khan Academy

In the last video, we talked a little bit about, or at least potentially starting, a cupcake factory. But this is a major investment that I'm thinking about making. So, like, at minimum, I made a spreadsheet here in Excel, and it's available at [conacademy.org/downloads/cupcakes.XLS](http://conacademy.org/downloads/cupcakes.XLS). If you just click slash here, you'll see everything in the download directory, but I'm going to start putting more stuff there, so I encourage you to play with it. This spreadsheet essentially does all the math for us that we did in the last video. So, you know, the investment in the factory, and let's say, you know, in the real world, once I actually got bids from contractors and things like that, it ends up costing **$1.1 million**. The annual capacity is **1 million cupcakes per year**. The cost per cupcake, let's say, I don't know, input costs went up for whatever reason. Now that I have a computer doing the math for me, I can deal with a little bit funnier numbers. So let's say it's **$1.50**. The price charged per cupcake is **$2**. Well, actually, it can be anything, right? This is going to be an input field, and right now it says **$2**. This is, let's say, what we assume is how many cupcakes we sell. In this scenario, this is the income statement, at least as far as we get to the operating income line. It calculates that you have **$2 million** of revenue. Notice what happens when I change it. If I sell my cupcakes for **$1.50** per cupcake, then I only have **$1.5 million**. So it actually computes what we need it to compute. It computes the cost of goods sold. If I change the number of cupcakes, let's see, if instead of a million, if I sell **500,000**, it calculates everything accordingly. In all these scenarios, it tells me my operating income. If you go a little bit lower, it tells me, well, capacity utilization—that's just how many cupcakes I sold divided by how many I could make. So that's **50% utilization**. My return on asset is my operating income divided by my initial investment, right? So this is **$275,000** divided by **$1.1 million**. It was a minus **$255,000**, so this is actually a bad outcome. In the last one, I touched on a little bit that, you know, the real lever, the real lever that I, as the owner of my cupcake factory, can change is price. Obviously, if I charge a lower price, more people are going to want to buy my cupcakes. If I charge a higher price, fewer people will buy them. Although, you know, there are some things that when you charge a higher price, people think it must be better, so maybe they want it, or they want to show off to their friends, and you know, look at this expensive cupcake that I eat. It's kind of a status symbol. But, you know, for the most part, the lower the price, the more you sell. Now we can actually figure out under what combinations I'm going to make certain amounts of money. If I charge **$1.50** per cupcake and I'm only able to sell **500,000** cupcakes, I'm going to take a loss per year of **$275,000**. If I sell them for **$1.75** and if I sell, I don't know, **700,000** cupcakes, I'm almost at break-even. Let's say I have to do **$1.85** here. In this situation, I actually make money; I have a **5% return on asset**. Just so you know, this is a major investment that I'm making—**$1.1 million**. I actually want to make sure I understand all of the scenarios of price and sales. So what I did is actually used Excel to do a sensitivity study. I put all of the—let me just go to that part of the spreadsheet, and I encourage you to play with this because it's interesting. It shows you that even a fairly simple business, you can do a lot of analysis. If you're in high school or in middle school, this could actually be a fun—I don't know if they allow this type of thing for science projects—but go to a local business and kind of analyze the business in a hundred different ways. Actually, if you watch the probability videos, I do all those things on processes and things like that, and you can analyze a business and do Excel spreadsheets. You'll probably end up winning the state science fair. You could call it a math project or engineering project. But anyway, here I wanted to figure out what my return on asset is—essentially, my operating profit divided by my initial investment—depending on the different prices I might charge and the different quantities. Here, it's kind of hard to visualize, so I graphed it as a three-dimensional surface. You see here, if I charge **$2.80** and I only sell **300,000**, then this is my return on asset right here. This curve is the zero curve, right? So this is actually my break-even right here. Any point along this break-even curve, I'm break-even. If I'm at **$2.80** per cupcake and I only sell **300,000**, I'm break-even. Or if I sell **$1.60** per cupcake but I sell, I don't know, **900,000**, then I'm also break-even. This is my break-even curve. This is what I want to avoid. Everything here is in the negative, according to the legend, from **-50% to 0% return**. Here, I'm losing money. I would color it in if I wasn't in Excel mode, but if I only charge **$1.60** per cupcake and I only sell **400,000** cupcakes, I'm going to have a negative return. We can actually figure it out in that little worksheet I just did. But anyway, this is fun to look at, and I encourage you to play with it. It shows you that it's a fairly interesting and sophisticated thing that you have these two variables that change. Even though this is kind of about as simple as a business can get, you can only imagine what happens when you start varying the other parameters. But these are the two big ones. So let's say, you know, when I come out the gate, I want everyone in town to taste my cupcakes because I think once they taste it, they'll realize that they're delicious. By the way, I've also learned from the cigarette companies, and I've put nicotine in my cupcakes, so I think people will become addicted to them. I want to charge a relatively low price for it. Let's say I do come out the gate at, oh, I don't know, **$1.75**. That's a very cheap price for cupcakes, and there's actually no cupcake producers in this town right now, so I just sell out. I'm making **$200,000** per year, and that's an **18% return on asset**. A lot of people would be happy with that, but I'm like, hey, you know, I'm leaving money on the table because I'm selling out of my cupcakes. So what happens if I raise my price a little bit? I should just, you know, I'm fully utilized, right? I have **100% utilization**, so it makes sense for me to see if there are any, you know, maybe there are some people who want cupcakes who can't get them because I can't produce that many. Let me raise my price a little bit. Let's say I raise it to **$1.85**. At **$1.85**, it still turns out that I'm selling **1 million cupcakes** in a year, and now I was right; I was leaving money on the table. Now I'm making **$300,000** a year, so this seems like a good idea. I want to see kind of how much people are willing to pay. So let's say I raise the price to **$2**, but in that scenario, **$2** starts to get a little pricey for people. It just kind of gives a little sticker shock. Maybe I should have done **$1.99**. I don't sell a million; I sell **950,000**. There were maybe **50,000** people on the margin who said, hey, you know, I'd buy at **$1.85**, but I'm not willing to buy it at **$2**. But this still works out, right? I'm still making more money even though I'm selling fewer cupcakes because I'm charging so much more per cupcake, and I'm making a **37% return**. Let's say I keep figuring this out, and I figure out the optimal point is me charging **$3** per cupcake. At **$3** per cupcake, I'm able to sell **750,000** cupcakes, and I make **$962,000** a year. I have a huge return on asset—**88%**. Imagine a business or some investment where you get **88%** of your money every year. So that's all in good, and I'm driving a Bentley, and I have the biggest house on a hill in town and all of that. But other people say, hey, all Sal's doing is making cupcakes. I can make cupcakes too, and I have some money to build a factory. This is a better return on investment than the stock market or anything else that I know of, so I'm also going to get into the cupcake factory business. Here, and this is the second worksheet in this spreadsheet, the second worksheet right here. So let's say, what was my—I was at **$3**, and what did I say? **750,000** cupcakes, and my cost was, I don't know, **$0.05**. I was making **$962,000**. But then Imran—just so you're curious why I wasn't recording videos for the last two weeks—actually, Imran is the name of my son, and he came into the world two weeks ago. I think it makes sense to name a cupcake store after him. But let's say he comes in and he's like, well, you know, I'm tired of getting an allowance from Dad. I also want to produce cupcakes, and he actually has more money because his grandma gave him, I don't know, more money. She likes him more than maybe her son. So he has **$1.5 million** to invest because he's like, wow, this is such a good investment. Let me put more money into it—**$1.5 million**—and he builds a factory that can produce **2 million cupcakes** a year. He's like, you know what? It's a more efficient factory, so it actually uses a little less electricity and wastes less cream and frosting and, I guess, nicotine as well. The cost per cupcake is less, and he decides to undercut his father. He charges **$2.90** per cupcake. When he charges **$2**, well, you know, everyone just kind of runs to him because his cupcakes are just as good. There really wasn't much of a barrier. So let's say he sells **500,000** cupcakes, and then I'm only selling **250,000** at **$3**. There are just some people who like my cupcakes, so I'm pretty much almost break-even. I say, well, you know, these are my die-hard fans, and to benefit them, these guys aren't going to go anywhere else. I'm going to raise my prices a little bit just because I know that these guys like me. At least in that situation, I'm cutting a profit. But then I say, well, you know what? This isn't a good state of affairs. He took all my business. I actually want you to notice something right here: what happened immediately. I was making an **88% return** on my money, right? Just when this Imran comes in and he enters into the space, all of a sudden, what is the return? He's only running at **25% utilization**, but his return on asset has gone down to **20%**. Because he's at that low utilization, his return on asset's gone down to **20%**, and then my return on assets has gone down to **1%**. So there's a general theme here: when someone is doing really well and getting a really great return, it attracts competition. It attracts capacity. If there's enough demand to satiate that new capacity, maybe they will get a better return. But in general, over time, if there's a very favorable return, more and more competition will enter the market. Actually, I've run out of time in this video. In the next video, I'll talk about more scenarios with competition. See you soon!

Назад

Залогинтесь, что бы оставить свой комментарий