Biz caf calculating the cost of making a cup of coffee
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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

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Biz caf calculating the cost of making a cup of coffee

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

Ted Mitchell


Sources of information

Sources of Information

  • General Information in the student manual

  • Coffee Calculator in game

  • Materials Report in the game


Calculation for variable cost per cup

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

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 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

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

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

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

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

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 coffee1

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

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) / (lbxQ)} 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

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

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

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

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

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

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

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

A more formal approach

  • Is to decompose the cost per pound into

  • Cost per cup and cups per pound


New assignment

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

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 model1

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 cup1

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

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

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 assignment1

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!


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