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This solution will look at the concept of profit and business model strategy using simple terms, and a business example with 4 different scenarios. The solution will walk the student through a sole proprietorship that develops into a corporation and starts to grow its business. Different factors will be reviewed, such as variable costs (material inputs) and fixed costs, as well as production targets, strategy, and diversification of the product's customer base. The solution intends to show the student how a business owner has to seriously consider its cost and revenue strategy to determine the daily profit and the yearly profit and verify whether the business model works for the business.

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Explaining the concept of profit and strategy through a small business example

As a business manager or owner, determining whether you should pursue a business strategy is centered around maximizing profits (revenues - costs). In these four scenarios, the cost and revenue strategies are evaluated, and provide the reader an idea into the factors that should be considered when determining a company's business model.

Scenario 1: Stone, Jessica (Sole proprietorship that sells flower pots)

Imagine you are running a small sole proprietorship in the home décor industry. Your sole product line is customized flower pots (with unique engravings). On average, you produce 5 flower pots a day. The selling price for each flower pot is \$30. You are a first-time business owner, and putting in a lot of your personal investment into this venture. You can afford to take a wage cut and initially make a \$8/hour wage (\$64/day). The cost of making each flower pot is \$10. In addition to the costs of making the product, your business' other costs (fixed costs, i.e. overhead), which include rent, electricity, Internet, and expensive accounting software, is a total of \$20 per day. In this scenario, your company's daily profit is:

P = (30x5) - (64+50+20) = 150 - 134 = \$16

(Note: Your wage is \$64/day and the material inputs to make 5 pots are a total of \$50/day)

Using the assumption that you work full-time for 5 days a week and for 50 weeks each year, your business' yearly profit is \$4000.

Scenario 2: Stone, Jessica decides to expand production

In addition to running your flower business, you formerly ran a nightclub business. However, you have now decided to cut this evening venture out of your life and focus only on the flower pot making business. You have some more time on your hands and- through learning the skills of the trade- and will now produce 3 more flower pots above ...

#### Solution Summary

This solutions looks at how managers can craft their business model and profit maximizing strategy in response to different factors affecting costs and revenues. The solutions goes through 4 scenarios using a small business example.

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