Teachers' TV Activity

Teachers' TV activity

Title Gateaux Galore activity

Author Gill Wright, head of business studies, Brighouse High School

Associated Teachers’ TV programmes KS3/4 Business Studies: Sales and Profit

Programme description A simple game to help teach the business concepts of sales

Note to teachers This activity was not created by Teachers' TV but the author has allowed us to publish it here to be used for educational purposes Adapted from CRAC materials

Gateaux Galore

Introduction

You own a business which produces gateaux. The cakes are sold by the crate. You are in competition with three other cake companies in the same market. Your objective is to make the highest profit possible.

The gateaux go stale if they are kept for too long. This means they cannot be stored, so any unsold cakes cannot be carried forward from month to month.

Every month, you will have to make two decisions:

 How many crates of cakes to produce  What price to charge for each crate you want to sell

Production

Your first decision is how many crates of gateaux to produce. Your business owns a factory for making the gateaux. This factory has fixed costs of £4,000 per month. Fixed costs are costs incurred simply by possessing the factory. They still have to be paid even if no cakes are being made (eg machinery, vehicles, mortgage, loan repayment). Your business also incurs variable costs of £1,000 for every crate of cakes produced. Variable costs are costs that vary with the number of cakes being made (eg the cost of flour, eggs, cream needed to make the cakes). So, for example, the costs to your business if you made three crates of cakes would be:

Fixed costs £4,000 Variable costs £3,000 ______

Total costs £7,000 ______The price that you charge will determine the number of orders you get. The customer works out how many orders each company will get by comparing the prices that each company is charging that month:

Cheapest price = 8 crates ordered Next cheapest price = 6 crates ordered Next cheapest price = 4 crates ordered Highest price = 2 crates ordered

If two companies have the same price, the orders are averaged out between the two companies. If you have not produced enough crates to meet the order, your sales will be reduced accordingly.

To play the game

1. Decide on the name of your business

2. Fill in the number of crates you want to produce on your decision form. Remember the customer will buy a maximum of eight crates, so there is no point producing any more than this

3. Now fill in the price you will charge per crate. You can charge any price between £1,000 and £10,000 (your price must be in multiples of a thousand, eg £2,000, £4,000, £8,000)

4. Take your decision form to the umpire

5. Fill in the number of sales you have made and calculate all your costs, revenue and finally, your profit

6. Play the game for six months and add your profit each month to calculate the total profit over the six-month period. Decision form

Name of company ......

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6

Price (must be in units of £1,000, max £10,000)

Number of crates produced

Number of orders from the customer

Variable costs (number produced x £1,000)

Fixed costs

Total costs (fixed costs + variable costs)

Number of sales

Sales revenue (number of orders x price) Profit or loss (sales revenue - total costs)

Cumulative profit Follow-up activity

Break-even graph

The purpose of a break-even graph is to calculate how many crates of gateaux you need to sell in order to make a profit. On a piece of graph paper, copy and complete the table below. For the sales revenue, base the price you charge on £2,000 per crate sold.

N U M B E R O F U N I T S

1 2 3 4 5 6 7

Fixed costs

Variable costs

Total costs

Sales revenue

1. On your graph, plot: - the fixed costs - the total costs - the sales revenue

2. Mark the break even point (BEP)

3. Shade in the profit area blue and the loss area red

4. How many crates of gateaux do you need to sell in order to break even? Teachers' notes

Type of activity: One-hour lesson

Level: GCSE Business Studies/GNVQ Intermediate Business, no previous knowledge required

Preparation: Purchase a cream cake for the winning team Photocopy instructions/decision forms

This activity can be used as an introduction to business costs and how to calculate profit, or used for revision purposes.

1. Pupils should be split into four groups (you can use five groups, but the number of possible orders must be increased to 10, and so on)

2. Each group should be given a copy of the decision form and given one minute to think of a company name. They write this company name on their decision form

3. Explain the principle of the game – to make as much profit as possible and beat the competition (the other three groups in the room). Discuss and explain the principle of price. For the purposes of this game, the customer is only interested in price – the cheapest price gets the most orders. If this activity is a revision exercise, discuss the other factors that affect a customer’s decision to buy. Explain that the first round is a practice round and the figures should be completed in pencil

4. Each group must decide on a) How many crates of cakes to produce b) What price to charge per crate

The pupils write their two decisions on their decision form. Remind pupils that secrecy is important. If there is access to a projector/interactive whiteboard, it is useful in the first round to show students how to complete the decision form 5. A representative from each group brings the decision form to the customer (the teacher) and then returns to their group. When the customer has received all the decision forms, they decide how many crates to buy off each group. The customer fills in the "number of orders from the customer" based on the price:

Cheapest price 8 crates Next cheapest 6 crates Next cheapest 4 crates Most expensive 2 crates

6. If two companies are charging the same price, then you give them both the average. Eg if company A charges the most expensive and company B charges the next most expensive, then both companies would receive three orders, as (4+2) / 2 = 3

7. It must be noted that you can only order what a company has produced - if you want to order 10 crates but the company only decided to make six crates, then the customer can only buy what was produced, ie six crates

8. Once the decision forms have been completed by the customer, they are returned to each company. Each company must now calculate their profit or loss for the month. Fixed costs are £4,000 per month, variable costs are £1,000 for every crate produced. In the first round, it is useful to explain and show students how to do the calculations

9. Calculate each company’s profit to check their calculations are correct

10. After the practice round, the game should be played "for real" and the companies should operate over a period of six months. Each month they can change their production and prices if they want to

11. At the end of the game, a number of issues can be discussed: a) Is price the only factor which affects whether or not a customer buys goods?

b) In which months did your company make the most profit? Why?

c) What is the ideal situation for this firm: producing too little but selling everything, producing exactly the right amount and selling everything, or producing more than enough and having some crates left over? Would this be the same for every business?

d) What would the total costs be if the firm produced nothing?

e) Are the number of sales always linked to the price a firm charges? Can you think of products which are price inelastic?

Follow-up activity

Gateaux Galore can be used as an introduction to break-even. Pupils can draw two to three graphs to investigate how the break- even point varies according to the price the firm decides to charge. It can also be used as an introduction to cash flow forecasting and pricing decisions.