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Marginal costs of a coffee?


a_time_for_a_cup_of_coffee

Image from wikipedia

The common cost of a cup of coffee debate raises  questions like 1) why does it cost €3 for a cup of hot water with some coffee; 2) why do some places give free refills? Where I work, if you want a cup of hot water it costs about 80c. So why does a cup of coffee or a cup of water cost so much. I will give you my view for what is it worth.

A colleague pointed to an article on The Guardian Food and Drink blog recently which posed a question “Is £2 a fair price for a cup of hot water and lemon”. The article describes a review of a coffee shop on TripAdvisor where a customer complained about the price. The manager duly drafted a long and detailed reply, justifying the cost. The justification included everything from the staff member cutting a slice of the lemon, walking in and out of the kitchen and so on – you can read it all at the above link. He argued the cost might be even more than £2.

So what is my view? The manager is right if you include all costs (i.e. full costing). But here is another way to think about this. The waiter, chef, light, rent, cups, equipment, decor etc have all been paid for and are sunk costs. Thinking about it this way, the extra cost of the coffee/tea/water & lemon or whatever else is simply the water and ingredients. Thus, a cup could be sold for a few cent and still make a profit on that one cup as long as the costs are covered. Of course to do this all the time would probably not make business sense, but sometimes if a business has already covered all its costs (or wants to minimise losses) it can engage in such marginal cost thinking – take GroupOn vouchers as an example. Such thinking about pricing and costs is not of course supported by financial reporting, which encourages us to think only in full cost terms. But going back to our coffee shop, if a waiter costs €/$/£10 per hour to employ, then this cost will not change regardless of whether (s)he serves 1 cup or 20 cups in an hour. Lowering prices might bring more people in, and they might buy more than just a cup of coffee – but to do this the manager needs to be aware of the nature of costs and make an informed decision.

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About martinjquinn

I am an accounting academic, accountant and author based near Dublin, Ireland.

One response to “Marginal costs of a coffee?”

  1. Shrey Srivastava says :

    Thanks for this blog post regarding the marginal costs of coffee; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on finance and economics at shreysfinanceblog.com, and would really appreciate it if you could follow, read and comment on some of my articles, and perhaps reblog and share some of my posts on social media. Thanks again for this fantastic post.

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