5 ms·
Lost me at lemonade stand "capital expenditure" being lemons... that's COGS, not capital.
by Nick87633 5y ago
Lost me at lemonade stand "capital expenditure" being lemons... that's COGS, not capital.
- deleted 5y ago[deleted]
- dragontamer 5y agoI like the idea of the lemonade stand representing different parts of a business. COGS are the parts of a product that can be relatively easily tracked per unit. So lemons, water, sugar are your COGS (cost of goods sold). If you sell lemonade at $1, your revenue is $1 per lemonade bottle. If your COGS is $0.40, your gross profit is $0.60, also known as "gross margin", or a 60% margin (IIRC, I always kind of forget how these things are calculated) Operating profit gets trickier: you add in all the bits of your business that you're amortizing over every sale. If you have a $10,000 juicer that squeezes lemons for you, and you EXPECT the juicer to last for 1-million units of lemonade, that's $0.01 per lemonade, so you subtract that out of operating profits. This $10,000 juicer, is what Nick87633 calls "capital expenditure", or CapEx as it is sometimes known. You need to buy this to "start" the business. In theory, you can sell the juicer for a depreciated value if your business goes under. (Ex: If you sell 500-thousand lemonade and then go out of business, you could make the argument that you can sell the juicer for $5000 as your business goes bankrupt). As you can see, Operating Profit has a lot of "opinion" in it: you estimate the value of your equipment if it were sold and/or the cost of replacement if it were damaged. (Ex: hurricane wipes away your lemonade stand and juicer. How much will it cost to replace the juicer?)