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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-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

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

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

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

• 1) best coffee is \$6 per pound

• 2) get 31.25 medium cups per pound

• 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

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

• 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

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

• 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

• 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

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

• 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

For those of you who are clinging to the view retailer might

• 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 retailer might

• 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?