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Peeps
Krista McAllester
Anne Shields
Introduction
This Fully Allocated Cost Project was performed in order to completely predict
and estimate the cost of producing a product. In this case, the production of
Fruit and Yogurt Popsicles by Popsicle Peeps was analyzed in terms of several
cost factors including:
Monetary Costs
Social Costs
Environmental Impact
Profitability Forecast
) To analyze these specific cost factors, various tools learned in IME 239
and IME 223 were implemented. Our team, Popsicle Peeps, utilized direct
time studies, financial statement analysis, process map analysis, and other
lean manufacturing techniques. Thorough cost analysis in areas of raw
material, direct labor, and overhead also proved significant in our mission to
calculate the Fully Allocated Cost for Fruit and Yogurt Popsicles.
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Monetary Cost
Variable Costs
Variable costs are costs that change depending on the level of a company's
production output, such as the cost of raw materials or utilities. Because we
are a very small business, with low production, we will try to maintain
competitiveness by minimizing our input costs.
Assumptions:
All our ingredients will be bought in bulk at Costco or other cheaper
grocery stores
Tools, like blenders, molds, etc. will also be purchased from discount
retail stores or seasonal sales
Our popsicles will be produced in batches of 6 because the mold used
in production and freezing is comprised of 6 individual popsicle molds.
Quantity
Frozen mixed
berries
14.4 cups
Cost in $
$8.99
Source of the
price
costco.com
Vanilla yogurt
8 cups
$5.99
costco.com
White sugar
9 cups
$2.35
costco.com
Popsicle sticks
500 count
$8.99
target.com
Total
$28.32
Cost in
$/batch
Frozen mixed
berries
2 cups
$1.24
Vanilla yogurt
2 cups
$1.49
White sugar
0.25 cups
$0.07
Popsicle sticks
6 count
$0.11
Total Cost
$2.91
Quantity per
popsicle
Frozen mixed
berries
0.3333 cups
$0.21
Vanilla yogurt
0.3333 cups
$0.25
White sugar
0.0417 cups
$0.01
Popsicle sticks
1 count
$0.02
Total Cost
Cost in
$/popsicle
$0.49
Normal Time
(min)
Net Time
(min)
.64
.208
.23
.143
.16
.055
.06
Blend
1.00
1.11
2.38
2.64
.08
.088
.30
.33
Give popsicle to
customer
.12
.133
Total:
4.86
5.39
Cost
($/batch)
$.89
Our total variable costs per batch are: 2.91 + .89 = $3.80
Our total variable costs per popsicle are: 0.49 + 0.14 = $ 0.63
Fixed Costs
Fixed costs are expenses that are not dependent on level of output and
typically remain constant over long periods of time. Although many fixed
costs cannot be avoided for production, such as rent and utility costs, the
equipment costs can greatly influence monetary cost analysis. We chose
highly rated products like Nelson CLT-6NR (Ice Cart) and Ninja Blender in
order to maximize our production levels. Costs for the equipment are
sourced from manufacturer's websites.
The assumptions for our Equipment Cost calculations are as follows:
All equipment uses straight-line depreciation.
Assume salvage value for the cart and freezer.
Table 5: Equipment Costs
Equipm
ent
Lifeti
me
Cost in
$
Ice Cart
15
$979.00
Blender
$79.97
Freezer
15
$508.00
$12.99
Mold
Total
Salvage
Value
Calculatio
n
Depreciation
per year
100 (979-100) /
15
0 (79.97-0) /
5
50 (508-50) /
15
0 (12.99-0) /
2
$1579.
96
58.60
15.99
30.53
6.45
$111.62
The total fixed costs are the costs in one year of operation.
Table 6: Total Fixed Costs
Investment
Depreciation of equipment
Cost in $
$111.62
Utilities
$2000
Rent
$1200
$3311.62
The Break Even Point is the revenue or the quantity of a product we have to
sell to break even. It is the point where total benefits equal total cost.
Our cost function is:
TC(v)= Cv * v + Cf
TC(v)=.63 * v
+3311.62
Our revenue is:
TR(v)=P * v
TR(v)=1.25 * v
BEP:
TR(v)=TC(v)
v=.63 * v +
3311.62=1.25 * v
v=5341.32
Where:
TR
Total Revenue
TC
Total Cost
V
Volume
P
Sales price
Cv
Variable cost
Cf
Fixed cost
If we sell 5342 popsicles in a year, we break even and our business is
profitable.
Product Cost
The product cost of one popsicle is determined by the costs of direct
material, direct labor and overhead. The overhead costs are all the indirect
costs of the product, divided by the amount of popsicles sold in one year. The
indirect costs are the fixed costs, in the company's case. Popsicle Peeps is
still in the beginning stages of production, so overhead is calculated in the
traditional methodno allocation of the overhead was necessary.
Assumptions:
30 popsicles are sold per day for one year
Overhead calculation: 3311.62 / (30*365) = .30
Table 6: Total Product Cost
Cost Type
Cost in
$/popsicle
Direct Material
$0.49
Direct Labor
$0.14
Overhead
$0.30
$0.93
Competitor Comparison
After our total production cost was calculated we found it necessary to
compare our total cost to the major competitors in the popsicle industry. One
Environmental Analysis
Current Popsicle Packaging Methods
Popsicle Peeps have made every step in the packaging process to be
environmentally conscientious. These popsicles do not have any wrappers
attached to them; they are sold fresh from the cart to the customer.
Furthermore, we will be hand wheeling the cart around the high pedestrian
areas during selling hours, requiring no gasoline. Popsicle sticks, made of
wood, are biodegradable and made from recycled materials. They more
environmentally friendly compared to paper or plastic cups as an alternative.
Social Costs
Employees Matter
Popsicle Peeps is a company that believes that their employees are part of
what makes its popsicles so special. The team behind Popsicle Peeps is vital
to its overall profitability and success as a business. Therefore, employees at
Popsicle Peeps perform in a working environment of only the highest quality.
Numerous benefits and resources for our employees include:
Breaks: 15 minute shift breaks and 30 minute lunch breaks
One free popsicle per shift
Flexible hours
Freedom to work in different locations
In-depth training sessions
Friendly and approachable management
Popsicle Peeps hopes to create a team of employees that are more than just
coworkers-they are your peeps!
Community First
Popsicle Peeps strives to make a positive impact in the greater San Luis
Obispo community as a thank you to our valued customers. Our goods are
produced locally and made from local ingredients whenever possible. We are
always striving to find ways to use new organic ingredients as kudos to our
Central Valley farmers. The nomadic nature of our business allows us to
serve you in many family friendly and community-oriented areas. Popsicle
Peeps is a proud regular at the San Luis Obispo Farmers Market and our
vendors can be found at various parks and beaches on the weekend. Our
Assumptions:
Used direct time study data
Work days per year: 365
Tax Rate: 30%
Interests costs per year: 300
Sales price and volume
Table 7: Sales Price and Volume Forecast
Year
Price ($)
2016
30
10950
1.25
2017
33
12045
1.25
2018
35
12775
1.30
2019
38
13870
1.40
2020
41
14965
1.50
2016
2017
2018
2019
2020
10950
12045
12775
13870
14965
Revenue
13687.5
15056.25
16607.5
19418
22447.5
COGS
10183.5
11201.85
11880.75
12899.1
13917.45
3504
3854.4
4726.75
6518.9
8530.05
25.60%
25.60%
28.46%
33.57%
38.00%
Operating
Expense
2265
2265
2265
2265
2265
Human
1005
1005
1005
1005
1005
Volume
Gross Profit
GM %
Resources
Finance
1260
1260
1260
1260
1260
Operating
Income
1239
1589.4
2461.75
4253.9
6265.05
9.05%
10.56%
14.82%
21.91%
27.91%
Interests Costs
300
300
300
300
300
Profit Before
Tax
939
1289.4
2161.75
3953.9
5965.05
Taxes
281.7
386.82
648.525
1186.17
1789.515
Net Income
657.3
902.58
1513.225
2767.73
4175.535
OI%
NI%
4.80%
5.99%
9.11%
14.25%
18.60%
Figure 2: Income Statement
The income statement above forecasts the next five years, based on wide
assumptions we had made. We assume an increasing production output and
subsequent higher price to meet market demands, which we assume will
increase. Further assumptions are made that operating expenses remain
stable despite this business expansion. Realistically, it is likely price,
demand, and raw material/direct labor costs will vary throughout years. For
these reasons, projected values are rough estimates. However, this template
serves as an easy calculation to see if we will have a positive net income
after taxes. It also can identify points of contact to increase NI% over the
next five years, giving us potential to expand this popsicle business.
When comparing our financial plan to other major popsicle producers, it is
easy to see that we are a very small entity within the frozen dessert market.
Our company is simply not at the high manufacturing and retail levels as our
competitors, such as Dreyer's. However, when we look at our business on a
micro-scale, it is realized that Popsicle Peeps in the leader for local and
natural popsicles in San Luis Obispo. Once accomplished, our five-year plan
may provide lead way for expansion into nearby cities. It will only be at that
time, however, when we can begin to compare our financial growth to other
major companies. For now, they serve as a business model and tool for
Popsicle Peeps future endeavors.
1.
2.
3.
4.
5.
After conducting direct time study, we were able to reduce waste from
human mistake by methods of standardization.
Sorting: We got rid of unneeded kitchen equipment and created designated
shelving for our raw materials and completed units (popsicles).
Stabilize: We assigned different countertops to complete separate tasks
during the manufacturing process (i.e.: adding countertop, blending
countertop, pouring countertop).
Sweeping: Ensured during training and through inspection that workstation
was kept clean and orderly.
Standardize: Preserve the first 3S. Standardized the measuring equipment
at scooping station as well set a blend time on blender.
Self-Discipline: Maintain standards through cohesive and positive culture.
Lead through example as a manager, owner, or partner.