Cost and Profit: How Much Is Really Yours?

Lucy is twelve years old. She lives in Riverton with her parents and her brothers, Jack and Max. This summer, she has a new business idea: a lemonade stand in front of Rose's Bakery, with lemons from Uncle Tom. Grandma Rose loves the idea, and she sits down with Lucy at the kitchen table to talk numbers.

Grandma says, "Before you sell your first cup, tell me about your costs."

Lucy writes two lists. The first list has things she buys only once. She needs a wooden sign for $6 and a pitcher for $4. These cost $10 in total, no matter how many cups she sells.

The second list has things she needs for each cup: lemons, sugar and a paper cup. Together, they cost $1 for every cup she makes.

Grandma says, "Good. You have just found your two kinds of cost."

Grandma adds a note at the bottom of the page. Lucy's own time is a cost, too, but for now they will count only the money.

Fixed and Variable Costs

A fixed cost stays the same no matter how much you sell. Lucy's sign and pitcher cost $10 if she sells one cup, or one hundred cups.

A variable cost changes with the number of things you make. Lucy spends $1 on every cup, so 20 cups cost $20 to make.

Revenue is the money you receive from sales. Profit is revenue minus total cost, and total cost is fixed cost plus variable cost. If revenue is less than total cost, the seller has a loss.

Lucy has a question. She asks, "What price should I choose? Two dollars, three dollars, or four?"

Grandma says, "Try it. Think about how many cups people will buy at each price."

Lucy tests three prices over three Saturdays.

Back to the Kitchen Table

Lucy studies her table. At $2, she sells the most cups, but she does not earn the most profit. At $4, she makes the most from each cup, but too few people buy. The best price is $3.

Grandma says, "More sales do not always mean more profit. The price decides how much is left after the costs."

Lucy says, "What if I open a second stand next month?"

Grandma laughs and says, "First, let's make the first one work."

That night, Lucy puts her notebook under her pillow and dreams about a hundred cups of lemonade.