Question

Case Overview:
You are an intelligent ten-year-old child who wants to start a lemonade stand. You live in Duluth, Minnesota in a middle class neighborhood, with all of the benefits and constraints of a typical child of that age. As a start, you have outlined three possible business plans:

Fresh Squeezed Plan:

Your mother has agreed to loan you $5 to get your fresh squeezed lemonade stand started and she will let you use her lemon squeezer at no charge, provided that you don't ask for any more help because she is really busy investing in real companies as a partner in a boutique Duluth-based VC fund. Without too much hesitation you take her up on this figuring it’ll be enough to get going because you know that a bag of lemons costs $2.50. After doing some more research, you calculate that you can make ten cups of fresh squeezed lemonade from the lemons. It’ll take approximately one hour to make and you believe you can sell each cup for $1. The total cost of lemons, cups and ice for ten cups comes to $3.75. Your mom will also loan you a chair and table for the day as she’s very supportive of fresh lemonade, and the cost to make a paper sign will be approximately $1. Weather will not be a factor for demand because you will not squeeze the lemons until it's a warm day. Because your mom is nice, she is not charging you any interest on the loan she has agreed to provide.

Frozen Lemonade Plan:

If you want to sell lemonade made from concentrate, your mother will buy you three cans of frozen concentrate for $1.00 each. Each can makes approximately 20 cups. You believe you can sell 20 cups each day for $.50 each, but fear if the weather is cooler than expected you might only sell 10 cups per day at this price. Thirty cups plus ice cost $5.25. Chairs and tables cost $1 per day to rent in this scenario as your mom is a bit wary of you hocking concentrate lemonade. Your mother will not rent them for longer than three days, so you will shut down the stand after three days. The cost of a sign is still $1. You also need a pitcher that will cost $5 to handle the larger volume of lemonade.

Lemonade Mix Plan:

If you want to sell lemonade from a powdered mix, your mother wants no part of it. She tells you to go talk to your father. He agrees to buy you a tin of powdered lemonade for $8 that makes 1000 cups. You believe you can sell 100 cups of this lemonade each day for $.25 per cup, but only if you move the stand down the street to your uncle's house where there is more traffic. You fear if the weather is cooler than expected that you may sell only 50

cups each day. The cost for ten cups and ice (not including the lemonade) is $1.75. Because the volume for this business is higher, you must pay your little brother $.03 per cup to fill and serve them. Your uncle will rent you a table and chairs for $1 per day for a maximum of ten days. Buying a pitcher, hose and larger stand and sign will cost $15. You lack this additional $15 for hard assets, but your big sister will loan you $15 if once you pay her back she receives a third of your profits.*

* By this, we mean that you will pay back your sister $15 once you have $15 in profit, and then give her 1/3 of every dollar of profit from then on. She drives a hard bargain.

With this info, fill out the following:

Powdered $0.25 Lemonade Stand Unit Economics (10 Total Points) Your Name Facts from the case Fresh Frozen Price cup $1 $0.50 Var cost/cup Fixed cost/day PSI/Capital Invested Total cups sold - expected 10 6 0 Total cups sold - worst case 10 30 1000 500 Fresh Expected Frozen Expected Low Powdered Expected Low $1.00 $0.00 $0.50 $0.25 $0.25 Break Even Revenue/cup Variable cost/cup Contribution/cup Fixed period costs (FPC) Cups/day Breakeven on FPC 3 points Rev/cup Cups/day Rev/day Variable costs/Day FPC/Day Profit/Day Primary Sunk Investment Payoff of PSI (days) Days in operation points Projected Proforma Returns At End of the Lemonade Stand (Total Length Varies for Each Plan) Total Revenue COGS (var costs) SG&A (FPC) Net inc 11.75 Points 2 Points Interest Payment to Big Sister Net takeaway for the kid Profit/day (0.25 Points) What key factor was excluded from consideration in these unit economics that could affect decision making?

Answer 1

Answer:

Facts form the case
	Fresh	Frozen	Powdered	Remarks
Price/ cup	1	0.5	0.25
Variable cost per cup	0.375	0.225	0.213
Fixed cost per day	-	1	1	Rental of chair and table
PSI/ Capital invested	1	6	15
Total cups sold - expected	10	60	1000
Total cups sold - Worst case	10	30	500

Calculation of variable cost per cup

				Calculation
	Fresh	Frozen	Powdered	Fresh	Frozen	Powdered
Lemons	0.25	0.05	0.008	=2.5/10	=1/20	=8/1000
Cups and ice	0.125	0.175	0.175	=(3.75-2.5)/10	=5.25/30	=1.75/10
Little brother service			0.03
TOTAL	0.375	0.225	0.213

Calculation of PSI/ Capital invested

	Fresh	Frozen	Powdered
Paper sign board	1	1
Pitcher		5
Pitcher, hose and larger stand			15
TOTAL	1	6	15

Next table

	Fresh	Frozen		Powdered
	Expected	Expected	Low	Expected	Low	Remarks
Break even
Revenue/ cup	1	0.5	0.5	0.25	0.25
Variable cost/ cup	0.375	0.225	0.225	0.213	0.213	As calculated above
Contribution/ cup	0.625	0.275	0.275	0.037	0.037	Rev - VC
Fixed period costs (FPC)		3	3	10	10	FC per day X no of days
Cups/ day breakeven on FPC		11	11	271	271	FC/ Contribution
Revenue/ cup	1	0.5	0.5	0.25	0.25	As given
Cups/ day	10	20	10	100	50	As given
Rev/ day	10	10	5	25	12.5	Rev/ cup X Cups/ day
VC/ Day	3.75	4.5	2.25	21.3	10.65	VC/ cup X Cups/ day
FPC/ Day	-	1	1	1	1	As calculated above
Profit/ day	6.25	4.50	1.75	2.70	0.85	Rev - VC- FPC
PSI	1	6	6	15	15	As calculated above
Payoff of PSI	0.16	1.33	3.43	5.56	17.65	PSI/ Profit per day
Days in operation	1	3	3	10	10	As given
Projected proforma Returns at the end of lemonade stand (Total length varies for each plan)
Total revenue	10	30	15	250	125	Rev per day X Days in oper
COGS	3.75	13.5	6.75	213	106.5	VC per day X Days in oper
FPC	-	3.00	3.00	10.00	10.00	FPC per day X Days in oper
Net inc	6.25	13.50	5.25	27.00	8.50	Rev - cost - FPC
PSI	1	6	6	15	15
Interest payment to big sister	0	0	0	4.00	-	(Net inc - 15)/3
Net takeaway for kid	5.25	7.50	(0.75)	8.00	(6.50)	Net inc - PSI - Interest
Profit/ day	5.25	2.50	(0.25)	0.80	(0.65)	Net takeaway/ days in operation

Key factor excluded that could affect decision making is interest on working capital.