Cost analysis clarification

Introduction

To determine if a product is viable to bring onto the market, one has to find the total costs of the product and thus the profit margins and break-even points that can be achieved.

In an efficient cost-analysis, information is available about fixed costs and variable costs. Fixed costs are the costs that the company makes and are not related to the quantity of products that are produced. The fixed costs per product does go down with an increase in the quantity produced. Variable costs are costs that are incurred with the production of a product.

With these costs, important factors can be calculated that determine the viability of a product.

Excel

An Excel file was made to calculate the cost-analysis. The Excel file contains several sheets with different functionalities. A link to the Excel file can be found in the references.1

Variables

On the Variables sheet, the user can make changes to the input of the cost-analysis. Information can be entered about six categories: Material, Transport, Labour, Procurement, Company and Customer.

Tables

On the Tables sheet, a price buildup is shown. With the use of the filled in variables and some calculations, the fixed and variable costs are calculated for the normal and deluxe machine, as well as for the pods. References to the sources that were used can also be found on this tab.

Graphs

The Graphs sheet shows several graphs and bar graphs. Break-even graphs of the machines and pods contain the fixed and variable costs and the sales price. This makes it visual to the user what the breakeven point is. Too have an exact estimate, a bar graph about the break-even point is also added. A bar graph of the gross profit margin is also available. Together with a bar graph of the EBIT of the products and the total EBIT of the project.

Sources

On this sheet, sources can be found that are used for the variables and calculation as well as real time currency conversions.

Calculations

This tab is equipped with tables and formulas for calculations that are needed for the Tables and Graphs sheets. This is not directly relevant to the user. Calculations that are used will be explained further on in the text.

Fixed costs

Because there is no real company to take information from, a decision was made to assume that the concept company had roughly half the size as Nespresso. Because of the similar characteristics of the products and market Nespresso was chosen. Next to that, the concept focusses on the European market, thus an estimate was made of the fixed costs of Nespresso in Europe. Therefore, the half of total costs was implemented.2

With the use of available financial resources, the total fixed costs were determined to be close to 200 million euros. The buildup and exact numbers can be found in the Excel file.

A challenge appeared when the fixed costs had to be divided over the machines and pods. Therefore, a feature was added in the variables dashboard where the user can fill in the lifetime of the machine and the coffee consumption of the customers. With the use of calculations, the fixed costs will be divided over the pods and machines on the basis of the coffee consumption quantity. This does assume that the fixed costs are equal for both the machine and pod production. The Normal and Deluxe also share the same fixed costs quantity, therefore the break-even points of the machines indicate the break-even numbers if only that machine would be sold. This is a small detail that has been left out for the sake of efficiency and time.

Variable costs

The variable costs consist of material, processing, labour, and transport costs. For the processing costs an assumption was made that they are equal to a percentage of the material costs. A first assumption was made of 50%, but this is effortlessly changeable in the dashboard, because these costs can change over time and per production method.

An assumption was made with regard to the transport costs that 40-foot containers are used for the transport of the finished products, since the dimensions of these containers are an international standard.

Machine

The variable costs incurred with the production of the machine are different for the normal and the deluxe machine. On the first page of the Excel file, the user can easily fill in the data that is needed for calculations. This includes quantity if material needed, dimensions of product, delivery distance and procurement prices of materials. In the Excel file, the used sources are present which are used in determining the correct numbers.

With the combination of material analysis, sketches and SolidWorks models an estimation of material use can be estimated. The estimation is still a rough estimation and can differ in reality.