biz-café calculating the cost of making a cup of coffee ted mitchell

Biz-Café Calculating the Cost of making a Cup of Coffee

Ted Mitchell

Sources of Information

• General Information in the student manual• Coffee Calculator in game• Materials Report in the game

Calculation for Variable Cost per cup

• $5 per pound for good• $6 per pound for best• $7 per pound for organic• 1 shot of espresso for 12 oz cup• 2 shots of espresso for 16 oz cup• 3 shots of espresso for 20 oz cup• All Cups are about $0.09 each• Do NOT include any fixed costs or depreciation

Coffee Calculator

A Two-Factor Model for calculating the number of pounds of coffee to buy when selling medium size cups (16 oz.)Output = Conversion rate x InputOutput = (Output/Input) x InputOutput: Pounds of coffee to buy this week, lbs

Conversion rate: given as 0.032 Input: Your Forecasted Number of medium cups that will be sold, Q What are the units in the conversion rate?lbs = (lbs/Q) x Q

Conversion rate is written as 0.032 pounds per cup

Work on the cost of a medium cup

• Output = Conversion Rate x Input• We know• lb = (lb/cup) x Cups• We want• Number of cups = (cups/lb) x number of lb• NOTE: the conversion rate is inverted

Reverse the Two factor ModelInverts the Conversion Rate

• The conversion rate is inverted fromPounds per Cup to Cups per Pound

• 0.032 pounds per cup = 1/0.032 cups per pound

• 1/0.032 cups per pound = 31.25

medium cups per pound

Known so far is

• 1) best coffee is $6 per pound• 2) get 31.25 medium cups per pound

Assignment find V = cost per cup

• You could read it off your material report!• You could calculate it by looking at Revenue and Gross

Margin, Quantity on the Dashboard • Find COGS = (Revenue-Gross Margin) • dividing COGS by the number of cups sold• V = COGS/Q• BUT!• If you made perfect prediction and forecasts • What is lowest cost of coffee per cup?• Lowest Variable cost per cup, V?

Calculating Total Cost of Coffee

• Two Factor Model• Output = (Output/Input) x Input• Total Cost of Coffee =

(Total Cost/Pounds) x Total Pounds bought• Total Cost = Cost per Pound x Number of Pounds• You want to buy 50 lbs of best coffee at $6 a pound.

How much is the total cost• Total cost $6 per pound x 50 pounds• Total Cost = $6/lb x 50 lb = $300

Calculating Total Cost of Coffee

• Two Factor Model• Output = (Output/Input) x Input• Total Cost =

Cost per Pound x Number of Pounds

• I need the cost per cup, V! • does not take into account the number of cups• Expand, aggregate, and decompose to make the

number of cups explicit in the model

Expand, aggregate, and decompose to make the number of cups, Q, explicit in the model

• Total Cost of Coffee = Cost per Pound x Number of Pounds

• $ = $/lb x lb• $ = $/lb x (1/1) x lb• $ = $/lb x (Q/Q) x lb• $ = {($ x Q) / (lb xQ)} x lb• $ = ($/Q) x (Q/lb) x lb• Cost = Cost per cup x Cups per lb x lb• Cost/lb = Cost per cup x Cups per lb• Cost per cup = (Cost per Pound) / (Cups per Pound)• Cost per cup = $6/lb / 31.25 cups/lb• Cost per cup = $6/31.25 cups = $0.192 per cup

Total Variable cost per cup

• V = cost of coffee per cup + cost of paper cup• V = $0.192 + $0.09 = $0.282 per cup • V = 28.2¢ for a medium cup of coffee

We have calculated the

• Variable cost for a 16oz. cup of best coffee that has 2 shots of espresso to be

• V = $0.282• We must now calculate the cost of a small cup

and the cost of a large cup of best coffee• We need the number of shots of espresso in a

pound

Number of Shots of Espresso in a pound of coffee

• for a medium size cup• 31.25 medium cups per pound of coffee• Takes 2 shots of espresso to make a medium

size coffee• 31.25 cups in a pound x 2 shots = 62.5 shots of

espresso used• 1 pound of coffee makes 62.5 shots of

espresso

Cost per Shot of Espresso for Best Coffee

• Output = (Output/Input) x Input• Cost per Pound =

(Output/Input) x Shots per Pound

• $6/lb = (Output/Input) x 62.5 Shots/lb• $6/lb = Cost per Shot x 62.5 Shots/lb• $6/lb = ($6/lb) / (62.5/lb) x 62.5 Shots/lb• $6/lb = $0.096/ shot x 62.5 Shots/lb• Cost per shot = $0.096

Cost of Best Coffee for Small

• coffee cost per cup = cost per shot x number of shots

• Small cup coffee cost = $0.096 x 1 shot in a small cup

• Small cup coffee cost = $0.096 per cup• Variable Cost per small cup, V =

cost of the coffee + cost of paper cupV = $0.096 per cup + $0.09 = $0.186 per cup

• Variable Cost = 18.6¢ per small cup

Cost of medium Coffee at $0.096 per shot

• coffee cost per cup = cost per shot x number of

shots• Medium cup coffee cost =

$0.096 x 2 shot in a medium cup• Medium cup coffee cost = $0.096 x 2 shots• Medium cup coffee cost = $0.192 per cup• Variable Cost per medium cup, V =

cost of the coffee + cost of paper cupV = $0.192 per cup + $0.09 = $0.282 per cup

• Variable Cost = 28.2¢ per medium cup

Cost of Large Coffee at $0.096 per shot

• coffee cost per cup = cost per shot x number of

shots• Large cup coffee cost =

$0.096 x 3 shot in a medium cup• Large cup coffee cost = $0.096 x 3 shots• Large cup coffee cost = $0.288 per cup• Variable Cost per large cup, V =

cost of the coffee + cost of paper cupV = $0.288 per cup + $0.09 = $0.378 per cup

• Variable Cost = 37.8¢ per large cup

A more formal approach

• Is to decompose the cost per pound into • Cost per cup and cups per pound

New Assignment

• What is the variable cost per cup for the large 20 oz cup of Best Coffee?

• Calculate large cups per pound

Number of large cups that can be made per pound

• Output = Conversion Rate x Input• 62.5 Shots of Espresso =

3 shots per cup x large cups per pound

• Need to know the number of large cups that can be made per 62.5 shots of espresso

• Input = Output / (Conversion Rate)• Input is large cups = 62.5 shots/3 shots per cup • Large cup input is = 20.83 cups• 20.83 cups from a pound of coffee

Expand, aggregate, and decompose to make the number of cups, Q, explicit in the model

• Total Cost of Coffee = Cost per Pound x Number of Pounds

• $ = $/lb x lb• $ = $/lb x (1/1) x lb• $ = $/lb x (Q/Q) x lb• $ = {($ x Q) / (lb x Q)} x lb• $ = ($/Q) x (Q/lb) x lb• Cost = Cost per cup x Cups per lb x lb• Cost/lb = Cost per cup x Cups per lb• Cost per cup = (Cost per Pound) / (Cups per Pound)• Cost per cup = $6/lb / 20.83 cups/lb• Cost per cup = $6/20.83 cups = $0.288 per cup

Total Variable cost per cup

• V = cost of coffee per cup x cost of paper cup• V = $0.288 + $0.09 = $0.378 per cup • V = 37.8¢ for a large cup of coffee

Pricing the Coffee based on the Variable cost per cup as a retailer

might

• The variable cost of a large cup of coffee is V= 37.8¢ a cup. To achieve your normal marketing profits you charge a 92% markup on price. What is your selling price for a large coffee?

• Profit per unit = Markup on price x Price• Price = V/(1-Mp)• Price = 0.378/(1-0.92) = $4.73 for a large cup

For those of you who are clinging to the view

• This class all about memorizing stuff that you can look up

• The key thing to remember is• Cost per pound rate decomposes into

cost per cup rate x cups per pound rate• $/lb = $/cup x cups/lb• You want the variable cost per cup, V =$/cup• Can you google it?

New Assignment

• For Homework• You have a new super buzz size of coffee• It uses four shots of espresso in a 24 oz cup of coffee• What is the variable cost of a 24 oz cup using best

coffee?• You normally have a markup or 92% on a cup of

coffee. What is the selling price for a 24oz cup that will give you your normal 92% return on price?

• Show your work!