Lemonade Stand Case: Day 1

Each student is responsible for evaluating the unit economics of the lemonade stand options presented below (Fresh Squeezed, Frozen Concentrate, and Powdered Lemonade). You should download the Lemonade Stand Unit Economics spreadsheet and complete this. Once finished with this, take the Lemonade Stand Quiz through Canvas. You each need to fill out the spreadsheet and take the quiz individually, but youre more than welcome to contact other students in the class to discuss your work. Note, the quiz questions are taken directly from your Lemonade stand spreadsheet AND youll need the spreadsheet for the group work during class 3 so please fill this out before taking the quiz.

Case Overview: You are an intelligent ten-year-old child (4^th grader) 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 and need to solve the unit economics to decide which plan to pursue. Keep in mind that unit economics is about the profitability of your product and is different than the cash flow of your business. Also, for the purposes of this case, a day is the logical Period for all three business plans.

Fresh Squeezed Plan: Your mother has agreed to loan you $10 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 Venture Capital (VC) firm. Without too much hesitation you take her up on this figuring itll 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. Itll take approximately one hour to make and you believe you can sell each cup for $1. You are also going to need cups and ice for the lemonade. Thirty cups plus ice cost $5.25. Your mom will also loan you a chair and pitcher for free for the day as shes very supportive of fresh lemonade, but is charging you $0.25 for use of a table for the day. It will also cost you $1 to make a very durable paper sign. Weather will not be a factor for demand because you will not squeeze the lemons until it's a warm day. If all goes well, you may keep running the stand for several days after going to the store to restock your provisions of course, but at this time your plan and forecasting is that youll probably just sell lemonade for one day because youd rather be playing with your friends. 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 still loan you $10, but shes not quite as encouraging and is going to charge you $0.50 interest per day on the loan for each day that you stay open. She also will not accept repayment of the loan before you decide to shut your lemonade stand down even if you make enough money to pay her back early (remember, I said shes a venture capitalist). You decide to purchase three cans of frozen concentrate mix upfront for $1.00/can. Each can makes approximately 20 cups of lemonade. 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. You decide to just purchase the first 30 cups/ice upfront and will decide on purchasing more batches later depending on how sales are going. 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 plan to shut down the stand after three days and your forecasts are built around this being the total length of your business, but she did say that shes willing to discuss renegotiating terms after three days and potentially extending the stand depending on your level of success. 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 and loan you another $10 with no interest to help with other raw materials. The powdered lemonade tin makes 1000 cups. Your Dads a kindergarten teacher so hes not as used to negotiating financing deals as your mom is. Maybe you should have come to him earlier but oh well You believe you can sell 80 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 also figure youre going to need to stay out all day to get rid of that many cups but you believe its worth it. You do, however, fear if the weather is cooler than expected that you may sell only 40 cups each day. Because you plan to sell more lemonade youre getting cups and ice from Costco in bulk and get enough cups and ice for 100 cups for $8.50. You pony up for the first 100 and will purchase in batches as needed throughout the week (hopefully youre parents are cool taking you to Costco over and over) 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 which is how long you are forecasting to keep this business open. Buying a pitcher, hose and larger stand and sign will cost $15. You lack this additional $15 for hard assets (note the loan from your Dad isnt enough), but your big sister will loan you $15. The catch, however, is that she is charging you a 10% royalty on all revenue into perpetuity.*

*By this, we mean that you will pay her 10% of all revenue for as long as you sell lemonade. She drives a hard bargain and aspires to be a VC just like her mom and shes also watched a few too many Shark Tank Episodes and likes Kevin Mr. Wonderful OLearys style.

Lemonade Stand Unit Economics Your Name: Facts from the case Frozen Fresh $1 Powdered $0.25 $0.50 Price/cup Var cost/cup Fixed cost/day PSI/Capital Invested Total cups sold - expected Total cups sold - worst case 10 60 800 10 30 400 Fresh Expected $1.00 Frozen Expected Low $0.50 $0.50 Powdered Expected Low $0.25 $0.25 Revenue/cup Variable cost/cup Contribution Contribution Margin Fixed period costs (Period = Day) Breakeven # of Cups Operating Profit/Day Primary Sunk Investment (PSI) Variable costs/Day Payoff Time of PSI (days) Days in operation Projected Proforma Returns At End Total Revenue Total Variable Costs Total Fixed Costs Total PSI Loan Repayments Other Items Other Items Other Items Net cash takeaway for the kid Why is there a difference between the cash that the kid gets to take home and the net profit per day times number of days less the loan amount? Answer Here: Lemonade Stand Unit Economics Your Name: Facts from the case Frozen Fresh $1 Powdered $0.25 $0.50 Price/cup Var cost/cup Fixed cost/day PSI/Capital Invested Total cups sold - expected Total cups sold - worst case 10 60 800 10 30 400 Fresh Expected $1.00 Frozen Expected Low $0.50 $0.50 Powdered Expected Low $0.25 $0.25 Revenue/cup Variable cost/cup Contribution Contribution Margin Fixed period costs (Period = Day) Breakeven # of Cups Operating Profit/Day Primary Sunk Investment (PSI) Variable costs/Day Payoff Time of PSI (days) Days in operation Projected Proforma Returns At End Total Revenue Total Variable Costs Total Fixed Costs Total PSI Loan Repayments Other Items Other Items Other Items Net cash takeaway for the kid Why is there a difference between the cash that the kid gets to take home and the net profit per day times number of days less the loan amount? Answer Here