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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 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 • • • • • • 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 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 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 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!