### Cost per cup - Welcome to Prospect Learning

```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
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\$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 Input
Output = (Output/Input) x Input
Output: 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
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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 Model
Inverts the Conversion Rate
• The conversion rate is inverted from
Pounds 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 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 cup
V = \$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 cup
V = \$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 cup
V = \$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
• 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
New Assignment
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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?