Product Development Product Cost Analysis CULN 231-Food Innovation Spring 2017

Why is correct pricing important? Profitability of product Priced TOO LOW- lose revenue Priced TOO HIGH-customers might not see value

Variable and Fixed Costs Variable (direct and indirect) Costs Raw Ingredients Packaging Processing (co-packer, consultant) Labor (hourly, yourself) Marketing Shipping/Distribution Display/Shelf Space Fixed Costs (Costs that do not change month to month) Equipment Rent or Land Use Utilities (electricity, water, sewage, etc) Insurance (liability, building) Salaries

Variable Costs (direct & indirect) Cost of Production Cost of Production Variable Costs (direct & indirect) = + Fixed Costs

Break Even Point (How many units do you need to sell to break even) Break-even point (# units) Fixed Costs/month = _____________ Unit Contribution Margin

Break Even Point Calculation- Granola Company Example Fixed Costs/month (Rent, utilities, insurance, Management Salary ) =$2000 8 oz bag granola-retail price: $5.00 Variable cost per bag: $1.50 Unit Contribution Margin= retail $ - variable cost $5 - $1.50 = $3.50 Break-even point (# units) _______ $2000 572 units of granola/month = = $3.50 You would need to sell 572 bags of granola just to break even. This means NO profits yet!

Ingredient Cost Create a spreadsheet with list of ingredients Determine ingredient and amount in each recipe Convert cost of ingredient per unit measure (i.e. grams or ounce)

Spreadsheet Calculation Example

General Rule of Thumb for Pricing Retail Food Products Cost+ analysis Retail Cost=(Cost of Ingredients) x 6 Larger the factor, the more profit Competitor Pricing What are you competitors charging? Survey Market for comparable products Conduct Sensory Evaluation Tests Determine if your target market is willing to pay those prices.

Calculate Profit Goals Profit is the amount of money earned after all expenses are accounted for. Calculate # units need to sell to meet profit goal Profit Goal #units to sell _______ = Unit Contribution Margin #units for profit #units to break even = #units to sell + The amount of units to sell is additional to the break even # of units.

Break Even Point Calculation - Granola Company Example Refer back to the granola example. If you would like to make $1000 profit per month, how many bags of granola must you sell per month? Break even point= 572 bags Goal=$1000 profit= $1000/$3.50=286 bags 572 bags + 286 bags = 858 bags

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