An income statement and a break-even point both use the numbers from inside the business. Today's three models answer other questions: what buyers will pay, which option is worth its cost, and where a salon is strong or weak.
Twelve sections, about an hour and a quarter all up. One section is one sitting. Do that one and stop.
Three from the lessons so far. Have a go before you open them.
Yes, all of Five Star's costs are covered, fixed and variable. 12 foil jobs are 1 more than the break-even point, and every job past that point adds to the profit.
Option A cost less than the $4,800.00. The website ($2,400.00) and the advertising ($1,000.00) come to $3,400.00 at the start. Over three years, with the booking page's monthly fee, Option A costs $4,480.00, still less than $4,800.00.
For the salons, the $13.00 is a cost. For Bright Street, the same $13.00 is sales revenue.
Every Sunday, growers bring avocados to the farmers' market and shoppers buy them.
Kōwhai Grove is a small family orchard that sells at the farmers' market every Sunday. Avocados keep on the tree for weeks, so each week Kōwhai Grove chooses how many to pick now and how many to leave for a better week. This story is one Sunday in the middle of the season.
How many avocados would Kōwhai Grove bring to the market at each of these prices? Press a price to find out.
You buy avocados for your family's lunches.
How many avocados would you buy at each of these prices? Press a price to find out.
About ten growers like Kōwhai Grove sell at the market, and about 200 families shop like yours. For simplicity, let's assume that all ten growers bring the same number of avocados, and that all the shoppers think the same way about how many avocados they would buy at each price.
At each price, add up how many avocados all the growers would bring and how many all the families would buy, and you have a schedule: a table of the quantity supplied (what all the growers bring) and the quantity demanded (what all the shoppers buy). Press each price to plot its row on the graph.
| Price of one avocado | Quantity supplied | Quantity demanded |
|---|---|---|
| 600 | 1,400 | |
| 800 | 1,200 | |
| 1,000 | 1,000 | |
| 1,200 | 800 | |
| 1,400 | 600 |
A real schedule comes from research, such as a survey of shoppers. In your own assessment on pricing, you make the schedule from research into your own business.
At $1.00, there is a shortage of 800 avocados: shoppers want more than the growers bring. The avocados sell out early, so the growers put the price up.
For Achieved, draw a graph like the one above, from the schedule. Give the graph a title, and name both axes with their units. Then say that the growers are willing and able to supply at that price, because the price is profitable, and the shoppers are willing and able to buy, because the price is affordable.
At $2.00, the growers are willing and able to supply 1,000 avocados, because $2.00 is profitable, and the shoppers are willing and able to buy 1,000, because $2.00 is affordable.
At $2.00, supply equals demand.
In the week before the market, a storm knocks fruit off the trees. Every grower now has fewer avocados ready to pick.
How many avocados would Kōwhai Grove bring to the market at each of these prices? Press a price to find out.
The storm does not change your family's answers: you still want the same number of avocados at each price.
About ten growers like Kōwhai Grove sell at the market, and every one of them lost fruit in the storm. Add up what they would bring after the storm, and you have a second supply column for the schedule. Avocados are still popular, so the demand has not changed.
| Price of one avocado | Quantity supplied (before) | Quantity supplied (after) | Quantity demanded (did not change) |
|---|---|---|---|
| $1.00 | 600 | 200 | 1,400 |
| $1.50 | 800 | 400 | 1,200 |
| $2.00 | 1,000 | 600 | 1,000 |
| $2.50 | 1,200 | 800 | 800 |
| $3.00 | 1,400 | 1,000 | 600 |
After the storm, what does the model predict for the price of an avocado?
Before the storm, the supply line and the demand line cross at $2.00 and 1,000 avocados.
Write every step: the shift, the shortage, the price going up (the avocados sell out, so the growers charge more), and the new equilibrium with its price and its quantity.
The storm shifts supply to the left. At $2.00 there is a shortage of 400 avocados, so the growers charge more. The price rises to $2.50, where 800 avocados are supplied and 800 are demanded.
The storm makes the price go up.
Five Star chose Option A, a website with a booking page and three months of advertising, instead of Option B, refitting the front of the salon.
A cost-benefit analysis is another useful tool for deciding between the two options. The analysis compares the two options in dollars: what each one costs against what it is worth. Five Star looks three years ahead: long enough to include the booking page's fee of $45.00 a month, which starts in year two.
Sort each card about Option A into its box.
Website with a booking page: $2,400.00
Drag the card onto its box, or tap the box it goes in.
| Option A: the website | Option B: the refit | |
|---|---|---|
| Costs | $4,480.00$2,400.00 + $1,000.00 + $1,080.00 | $4,600.00the refit |
| Benefits with a dollar figure | $13,728.00a prediction | nonea refit adds no appointments |
| Benefits less costs | $9,248.00$13,728.00 − $4,480.00 | −$4,600.00$0.00 − $4,600.00 |
| No dollar figure | a better image; more people know the salon's name | a more comfortable salon to wait in; the salon shut for a week |
The decision, in dollars:
Over three years, Option A's benefit is $9,248.00 more than its costs. The benefit comes in a little each week, so the money Five Star spends at the start takes time to come back.
Option A costs $3,400.00 at the start: $2,400.00 for the website and $1,000.00 for the advertising. Press each year to see its working.
Cost-benefit analysis
| Option A at the end of year one | |
|---|---|
| Benefits so far2 cut and blow waves × $44.00 × 52 weeks × 1 year | $4,576.00 |
| Costs so farpaid at the start | $3,400.00 |
| Benefits less costs$4,576.00 − $3,400.00 | $1,176.00 |
The costs are prices Five Star has already been quoted. The $13,728.00 of benefit assumes two extra cut and blow waves every week for three years, which nobody can know in advance.
Cost-benefit analysis
Option A is $9,248.00 ahead over three years.
Put dollar figures in a cost-benefit analysis, never a score such as +5 or −3. Then describe your decision with the tool's figures, including the total cost of the option you chose.
Five Star chose Option A, which costs $4,480.00 over three years and brings a predicted benefit of $13,728.00.
Option A scores +5 and Option B scores −3.
A SWOT analysis sorts what Five Star knows into Strengths, Weaknesses, Opportunities and Threats.
Strengths and weaknesses are inside the organisation. Opportunities and threats are outside it.
Put a dollar figure in each box you can. A SWOT with no financial data is not a financial tool.
Strength: every Saturday booking is taken, and a full head of foils brings in $190.00.
Strength: Five Star is busy on Saturdays.
Every Saturday booking is taken, with both chairs in use. A full head of foils brings in $190.00.
Drag the card onto its box, or tap the box it goes in.
Each model answers one kind of question.
What is going well and badly inside Five Star, and what could help or harm Five Star from outside?
Drag the card onto its box, or tap the box it goes in.
Your answer earns the mark when it uses the figures from your model and names the business in the question. Compare these two answers about the Sunday farmers' market.
A model has to support your answer, and be explained with the business's own names and figures, not in general words.
At $2.00, the growers at the Sunday farmers' market supply 1,000 avocados and the shoppers buy 1,000, so the price settles at $2.00.
The price settles where supply and demand meet.
You may need to draw your own supply and demand graph from a schedule.
What each grade asks you to do:
Press each grade to see what it adds.
The market clears at $2.00 and 1,000 avocados a week. The growers are willing and able to supply at $2.00, because the price is profitable. Shoppers are willing and able to buy, because $2.00 is affordable for them.
The price is profitable for a grower such as Kōwhai Grove: at $2.00 and 100 avocados a week, its sales revenue is more than all of its costs. Kōwhai Grove pays a stall fee of $40.00 a week, a fixed cost, and each avocado costs it $0.50 to pick, pack and take to the market, a variable cost:
| Kōwhai Grove's week at $2.00 | |
|---|---|
| Sales revenue100 avocados × $2.00 | $200.00 |
| Total costs$40.00 stall fee + (100 avocados × $0.50 each) | $90.00 |
| Profit$200.00 − $90.00 | $110.00 a week |
For Achieved, you draw the graph from the schedule and say why, at the equilibrium price, the growers are willing to supply and the shoppers are willing to buy.
The questions this lesson makes people ask, answered simply.
No, you do not have to use all of them. Pick the model that answers the question you are asked.
Name the benefit and say you could not put a price on it. For example, more people knowing the salon's name is a benefit of Option A, but nobody can put a price on a better-known name, so write that down rather than inventing a figure.
Work out what is wrong before you open the answer.
The problem. The figures are correct, but the box is wrong. The salon's own book and the salon's own wages are inside the salon, and a threat is outside.
Strengths and weaknesses are inside the organisation. Opportunities and threats are outside it.
Weakness: the book has gaps in it from Tuesday to Thursday, and Sanjay is paid $24.00 an hour for those hours whether a client is in the chair or not.
Move the point to Weaknesses, keeping its figures.
The problem. That answer has no dollar figure anywhere in it, so nothing can be compared. A cost-benefit analysis with no financial data is not a valid financial tool.
Put a figure on every line you can.
The problem. The scores are opinions, not costs. A score like +5 or −3 is an opinion with a number beside it, and both options already have dollar figures.
Option B, refitting the front of the salon: $4,600.00 of costs, and no extra appointments, so no extra profit to compare with the costs.
Use the dollars you already have.
The problem. “The middle” is not a price. The crossing point is read off the axes as a dollar amount and a number of avocados, and the axes need their names and units.
Name both axes, then read the crossing off them.
The problem. Both sentences are true, but they do not use the schedule to show why the price is $2.00.
A model has to support the price, and its explanation has to be about this organisation, not general.
Use the schedule to produce the price.
The words this lesson introduced, each with an example that is right and one that is not.
SupplyGrowers will supply 1,000 avocados a week at $2.00 and 1,400 at $3.00.
Not supply (but one week's avocados)The 1,000 avocados growers brought last week. Supply is a number at each price.
DemandShoppers will buy 1,000 avocados a week at $2.00 and 600 at $3.00.
Not demand (but a feeling)“Shoppers really love avocados.” Demand is a number of avocados at a price.
A scheduleThe avocado market's table, with one row for each price.
Not a schedule (but a general statement)“Shoppers buy more when the price is lower.” A schedule gives a number at each price.
Equilibrium$2.00 and 1,000 avocados, where shoppers buy exactly what growers supply.
Not equilibrium (but a shortage)$1.50. Shoppers are 400 avocados short there.
A supply and demand modelA graph drawn from the avocado market's schedule, with both axes named, crossing at $2.00 and 1,000 avocados.
Not a supply and demand model (but an unlabelled sketch)Two crossing lines with nothing named on either axis.
A shortageAfter the storm, shoppers want 1,000 avocados at $2.00 against 600 supplied, so shoppers are 400 avocados short.
Not a shortage (but a surplus)Growers taking avocados home unsold. That is a surplus.
A surplusAt $2.50 growers supply 1,200 avocados and shoppers only want 800, so 400 avocados are left unsold.
Not a surplus (but a shortage)$1.50, where shoppers want 1,200 avocados and only 800 are supplied. That is a shortage.
A cost-benefit analysisOption A: $4,480.00 of cost over three years against $13,728.00 of extra profit, so the benefit is $9,248.00 more than the cost.
Not a cost-benefit analysis (but a list with no figures)“Costs: the website is expensive. Benefits: more clients and a better image.” No figure on either side, so nothing can be compared.
A SWOT boxWeakness: Sierra is the only qualified stylist, and Sanjay is paid $24.00 an hour whether the chair is full or empty.
The wrong boxThe gaps in the book Tuesday to Thursday filed under Threats. The book is inside the salon, so the gaps are a weakness.
These four tasks use this lesson's figures.
| Price of one avocado | Quantity supplied | Quantity demanded |
|---|---|---|
| $1.00 | 600 | 1,400 |
| $1.50 | 800 | 1,200 |
| $2.00 | 1,000 | 1,000 |
| $2.50 | 1,200 | 800 |
| $3.00 | 1,400 | 600 |
a.At $2.50, what is the quantity supplied, and what is the quantity demanded? Read both off the graph, where the $2.50 line meets each line. Then explain why $2.50 is not the equilibrium, how many avocados are left over, and what happens to the price next.
“$2.50 is not the equilibrium because the quantity supplied and the quantity demanded do not match there. Growers supply 1,200 avocados and shoppers only buy 800, which leaves 400 avocados unsold. Growers cannot sell what nobody will buy at that price, so they lower the price to sell them, and the price falls back to $2.00, where shoppers buy exactly the 1,000 avocados growers supply.”
The answer names the mismatch, the size of the mismatch, and who moves the price.
b.Suppose that instead of a storm, a warm, still week ripens extra fruit, and every grower brings 400 more avocados at every price. Press “The warm week”, then read the answers off the graph. At $2.00, the price before the change, how many avocados are left unsold? And where does the market clear afterwards?
“After the warm week, the growers bring 400 more avocados at every price, so the supply line shifts right. At $2.00 the growers bring 1,400 avocados and shoppers want only 1,000, a surplus of 400 avocados. The growers with avocados left over cut the price, and the market clears again at $1.50 and 1,200 avocados.”
The surplus comes before the new price, because the surplus is what makes the price move.
| Option A's costs | |
|---|---|
| Website | $2,400.00 |
| Three months of advertising | $1,000.00 |
| The booking page, each month from year two | $45.00 |
| Option A's benefit, each week, if the booking page brings two extra cut and blow waves a week | $88.00 |
c.The $88.00 a week is two extra cut and blow waves at $44.00 of extra profit each, and it is a prediction. Rework the analysis for one extra a week: what is the benefit over three years, and what is the benefit less the costs?
Option A finishes $2,384.00 ahead over three years.
Only the benefit moves, because the costs are prices the website company and the advertiser have already given Five Star, and the benefit is the prediction.
| Bright Street's month at $13.00 | |
|---|---|
| Sales (400 × $13.00) | $5,200.00 |
| Profit, after every cost | $460.00 |
d.Write Bright Street's threat box and its weakness box, with a figure in each, and say in one line how you knew which was which. SWOT: inside and outside sorted Five Star's points; this task is about Bright Street.
“Threat: the bottle company can put the price of an empty bottle up. A rise of $0.60 a bottle costs Bright Street $240.00 a month on 400 bottles. Weakness: the profit is only $460.00 a month out of $5,200.00 of sales, so a rise of that size would take $240.00 of the $460.00 profit, more than half.”
“I knew because Bright Street decides its own prices and spending, but not what the bottle company charges.”
Each box has a dollar figure, and the last line names the test: inside or outside.
Go Sierra, go!
That is the last of the models. You can draw up an income statement, find a break-even point, draw a supply and demand graph and shift its supply line, compare an option's costs and benefits in dollars, and fill in a SWOT without putting a point in the wrong box. Next comes the lesson that uses them: setting a price, and saying why that price is the right one.