Please select three companies and describe what they do. Select a major component of their production process and speculate on how to calculate unit costs. Identify what you think are their variable, fixed, and mixed costs of each.
I would like to talk about following 3 companies (all are based out in the USA)
- My Pillow – This company’s primary product is bed pillow, although they offer other products we will focus on the pillow (https://www.mypillow.com/)
- Chipotle Mexican Grill – This is a fast-casual Mexican restaurant (https://www.chipotle.com/)
- Oral B – They offer many oral care products, but we will primarily focus on manual toothbrush (https://oralb.com/en-us)
For My Pillow – they sell retail and online. Broadly they have 4 cost components
Raw Materials – Cotton and fabric – I would assume this should be variable
Operating expenses – Utilities, machine expenses – This should be variable
Rent and employee cost – salaries and benefits for Permanent employees and rent should be fixed expense
Shipping – Shipping to retail store and shipping directly to the customer – this should be mixed cost
My Pillow should use process costing – since it obtains raw materials, makes the pillow and then ships them out. Lots of homogeneous products are manufactured, hence I believe they use process costing.
Raw material which is cotton and fabric may vary in price based on the season or supply in the market, hence I believe, the cost is variable.
Rent for the factory and employees working in it should be fixed, at least for a year, so I think this cost is fixed.
Operating expenses would include any maintenance for the machines and utilities cost such as electricity and water, based on the usage the cost would vary.
Another expense is shipping cost, this is mixed because the products being shipped to retails must be going in bulk and in the truck, but most probably the products which are being shipped directly to customers, are being shipped via UPS, so the cost is mixed in nature.
Now to calculate the cost we need to add up the following
(Total raw material cost + Operating expenses + Rent + wages for permanent employees) and then divide by total number of units (in this case pillows) produced = pillow cost without shipping cost
Then we can add the shipping cost separately. Price for Units being delivered to retail stores can be calculated as
= (total shipping cost (that is transport + any other cost) / number of units transported) + Pillow cost without shipping cost
And any online order where the product is being shipped directly to the customer via UPS. For those case, we need to add the UPS Shipping Cost + pillow cost without shipping cost
In case of Chipotle, it is a casual Mexican restaurant, that serves quick take outs, and I think we can apply job cost to calculate unit pricing.
They have raw materials (such as lettuce, rice, tortilla, chips and whatever else they use) – these expenses are variable based on the ingredients being used
Operational expenses or overhead that includes rent, cutlery etc, this can be considered to be fixed
Employee expenses can be considered to be fixed expenses, permanent or not, Chipotle opening hours are fixed, and the number of employees at the restaurant is fixed, hence this is fixed cost.
Now how do we calculate the cost of any order?
Rental, utilities, and salary for employees these are fixed cost, and overhead expenses and ingredients expenses would be specific for the order and these are variable costs for a specific order.
Now say we place an order this is how we would calculate the cost –
Ingredient cost + (total fixed cost / time required to prepare the order) + (overhead expenses / number of order served)
The oral B manual toothbrush manufacturing process can use process costing. Since the raw material needs to be molded and then packed before those could be shipped.
So there are 3 components – raw material, packaging and shipping
Raw material should be fixed cost
Rental, machinery, and wages for employees – these costs should be fixed
Packaging material cost also should be fixed
Maintenance for machines and utility cost might be variable
Shipping cost should be fixed, considering products would be shipped to retail only
We can use process costing to calculate the cost of one unit because in this case many toothbrushes would be produced together. And the calculation would be –
(Raw materials cost + rental + utilities + wages + shipping + maintenance cost) / Number of units produced = cost of one tooth brush
Retrieved February 18, 2018, from https://www.mypillow.com/faq
Retrieved February 18, 2018, from https://www.chipotle.com/
Retrieved February 18, 2018, from https://oralb.com/en-us