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

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

3. 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

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

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

6. Break Even Point Calculation- Granola Company Example
Fixed Costs/month (Rent, utilities, insurance, Management Salary ) =$ 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!

7. 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)

8. Spreadsheet Calculation Example

9. 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.

10. 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.

11. 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 bags = 858 bags

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