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Principles of finance ah la shmoop expenses variable versus fixed

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We'll once again let's go back to our little anemic

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income statement for our lemonade stands are us thing with

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a few adjustments made aren't sawn in twentynine bucky age

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nineteen Credit card Sixteen thousand there All right Well this

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statement is seriously anemic It omits a ton of things

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that in real life you have to pay for When

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you run a really business like lawyer fees state unemployment

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fees insurance legal things and on why'd we omit them

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Kiss not the rock man Keep it simple Shmoop Ear's

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All right So for now precision is our enemy Just

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good wins All of that noted expenses break down into

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two key categories as you run a business fixed things

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like rent and insurance and that drinking cooler thing with

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the huge plastic bubbles of water and variable like lemons

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Hot month tons of traffic to the stores Well lots

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of lemons snow months and on so many lemons It'll

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very right Well when you build the sign ege for

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your lemonade stand or the stand itself the counter behind

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it the stools people sit on while they sip that's

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All fixed or fixed in place In this case it's

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a capital expense You'll pay for it once and then

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use it for years Hopefully so here's a tricky one

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for you If you spend a hundred bucks on a

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stool how much did it cost Good one Well for

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accounting nerds Uh here we go Answer a hundred books

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Answer be before or after tax extra points for that

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one Well can you expense the full hundred dollars Assumes

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you've committed to pay for it Should you Well if

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the stool will last five years and then be worth

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zero at the end of those five years wealth and

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isn't it really a twenty dollars a year kind of

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expense Even though you had to pay one hundred dollars

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in cash for it up front Well what if the

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stool is worth twenty dollars after five years when you

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sell it used on ebay That is it's Residual value

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is twenty bucks It will have lost eighty dollars in

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value during those five years not one hundred So what

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do you do Well you don't appreciate the whole hundred

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dollars in value of the stool as if it was

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Kindle ing at the end you just appreciate eighty dollars

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of it or sixteen dollars a year for five years

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while lots of other ways to think about expensing this

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expense and its relative value to the firm meaning that

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one way to look at assessing the cost of that

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stool sorry different stool Like what if a stool could

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last forty years or two years but that its duration

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was entirely dependent on the number of butts that sat

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on it All right In that case we turn to

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answer See prue would per glass per week per customer

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per But well there we go That's the winner let's

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say you pay one hundred dollars for that stool And

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in its lifetime it only sat butts from one hundred

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paying customers in that entire five years before then wore

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out Well then the cost of that seat per but

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was a buck that's a dollar but a buck a

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butt and each but or its owner paid a dollar

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for eliminates So that hundred dollars was a lot to

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pay for that stool based on the butts it served

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Why was the stool too fancy No it was expensive

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On a relative basis because you had so few customers

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using it if you'd had like ten thousand customer but

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sit on that stool over the course of five years

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well and per customer but it cost one hundred dollars

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divided by ten thousand or a penny a customer but

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and if on average each customer bought who drinks well

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it be half a penny a cup and that's ah

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point five percent in stool costs per cup cheap The

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big takeaway here however is that the stool cost is

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fixed it a ton of people use it assuming no

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breakage or only a few people use it well that

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hundred dollars you spent toe by it was fixed or

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set no very ability So all the stuff we were

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talking about above was fixed and remember fixed things are

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things like capital expenses like the stool which has kind

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of a set depreciation schedule and things like rent and

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insurance which generally don't change from month to month question

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is insurance variable or fix has an expense Well it's

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fixed Usually you don't change it every month you buy

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insurance based on a number of factors but once you

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buy it You kind of have a set premium and

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that's it You pay it month after month as the

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insurance company smiles and winks at you but it rikers

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as a charge month after month It is fixed but

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recurring you know like the costs of leasing a building

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All right so moving on next category variable costs cups

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and lemons the lemonade itself there variable amounts mostly but

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you don't buy Cops wanted a time Here's another curveball

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for you You buy them in boxes of a thousand

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saved money via volume discounts You get it You're a

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friendly people at costco Yeah we love costco So cups

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expenses air variable but at a unit rate of a

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thousand cups at a time So if the cups cost

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us dime than the unit variable is one hundred dollars

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box of a thousand cups Generally speaking the product you

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serve because it's volumes generally very is almost always a

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variable cost Okay here's curveball question our employees of variable

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or a fixed cost Well the answer both or at

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least some employees operate that way Think about a sales

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rep selling gigabit secure routers to banks with a friendly

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smile and a tie She gets a modest base salary

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maybe two grand a month and then she gets ten

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percent of whatever she sells If she has a big

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year and sells three million dollars worth of routers well

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then wow three hundred grand in commission for that year's

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work is her variable cost that twenty four grand a

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year of base salary was fixed All right what about

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taxes Are they variable Yeah it's very variable They change

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every year based on how profitable or not you are

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in that year Alright well at the end of this

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story you have profits hopefully and it's the job of

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companies to produce profits That's Why shareholders invested a dollar

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in order to get mohr than a dollar back when

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the company was started Of all the income statement line

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items profits or the squishy ist or most squishy is

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that what you think Well they can be cajoled manipulated

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faked stretch shrunk adam braided in uh tweaked in nineteen

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thousand ways So whenever you hear profits number be skeptical 00:06:13.087 --> [endTime] and a half

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