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Biz-Café 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

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

- $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

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

- 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

- 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

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

- 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?

- 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

- 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

- 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

- 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

- 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

- 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

- 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

- 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

- 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

- 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

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

- What is the variable cost per cup for the large 20 oz cup of Best Coffee?
- Calculate large cups 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

- 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

- 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

- 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

- 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?

- 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!