Revenue
How Much Money You Made: Price/Unit * # of Units Sold
Variable Costs
Costs that vary more or less proportionally with # of units sold:
Direct Materials (Bill of Materials, Packaging, Shipping) and Direct Labor (Manufacturing Line Tech, Sales Commission/Unit)
COGS
All costs directly associated with making and delivering a product
Fixed Costs or Period Costs
Costs calculated over a unit of time (a period) that stay fairly constant regardless of volume:
EX: Rent, Management salaries/non-production payroll, Marketing/Advertising, Insurance, Utilities
Contribution
How much money contributes to paying off fixed costs:
Revenue- Variable Costs
Contribution Margin
Contribution/Revenue
Breakeven (Cash Flow Positive)
# of Units you need to sell to cover fixed costs
Fixed Costs/Contribution
Net Profit
Profit left over after all expenses
1. (Units Sold * Contribution) - Fixed Costs
2. Revenue - Variable Costs - Fixed Costs
Primary Sunk Investment (PSI)
Large Non-Variable & Non-Periodic Costs
EX: Furniture & Computers, Tooling, Equipment, Patents
Payoff Time
PSI/Net Operating Profit
Unit Economics Strategy
Revenue - VC = Contribution - FC = Net Profit
Three Critical Ratios
1. Breakeven # of Units = Fixed Period Costs/Gross Profit per Unit
2. Overall Breakeven (Years) = Investment (PSI)/Operating Profit
3. Breakeven as % of Capacity = Breakeven # of Units/ Capacity