1. Biz-Café Calculating the Cost of making a Cup of Coffee
Ted Mitchell

2. Sources of Information
General Information in the student manual
Coffee Calculator in game
Materials Report in the game

3. 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

4. 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 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 pounds per cup

5. 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

6. 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 = medium cups per pound

7. Known so far is 1) best coffee is $6 per pound
2) get medium cups per pound

8. 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?

9. 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

10. 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

11. 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 / cups/lb
Cost per cup = $6/31.25 cups = $0.192 per cup

12. Total Variable cost per cup
V = cost of coffee per cup + cost of paper cup
V = $ $0.09 = $0.282 per cup
V = 28.2¢ for a medium cup of coffee

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. A more formal approach Is to decompose the cost per pound into
Cost per cup and cups per pound

20. New Assignment
What is the variable cost per cup for the large 20 oz cup of Best Coffee?
Calculate large cups per pound

21. Number of large cups that can be made per pound
Output = Conversion Rate x Input
62.5 Shots of Espresso = 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 = shots/3 shots per cup
Large cup input is = cups
20.83 cups from a pound of coffee

22. 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 / cups/lb
Cost per cup = $6/20.83 cups = $0.288 per cup

23. Total Variable cost per cup
V = cost of coffee per cup x cost of paper cup
V = $ $0.09 = $0.378 per cup
V = 37.8¢ for a large cup of coffee

24. 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

25. 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?

26. 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!