Go to www.YouTube.com and search for How It\'s Made, a television show produced

Question

Go to www.YouTube.com and search for How It's Made, a television show produced by the Discovery Channel that shows how thousands of products and services are created. Find aproduct that you have purchased in the last year, such as a toothbrush, ball point pen, jeans, headphones, candybar etc.

Answer following questions:

1. What product did you choose and how is it made?

2. How much did you pay for this product?

3. What are the major variable costs of making this product?

4. Provide your best guess of the variable cost per unit for this product. You do not need to do extensive research to find out the cost of the inputs, but try to come up with a reasonable estimate.

5. Based on your answers, computer the unit contribution margin and contribution margin ratio.

Explanation / Answer

1. I chose baby food or infant food. It is made by first grinding all the necessary raw material ingredients like wheat, soybean and rice and then cooking the powdered grains through high temperature extrusion chambers. The powdered grains become solid chunks once it comes out of the extrusion chambers. The large chunks are cut into smaller chunks and are again grounded in a machine to make them into fine powders. The powders are also sieved to ensure fineness. Thereafter these fine powders are poured in large mixers and powdered sugar, fruit concentrates, milk powders, dextrose and vitamins and minerals are added to it. After mixing them all for a fixed time, these are first packed in aluminum pouches and then into boxes.

2. I paid USD 6 for one box of baby food of 400 gm.

3. The major variable costs are the fluctuating costs of raw materials in the market. The cost of wheat, soybean and rice grains and also sugar and milk powder prices fluctuate on a day to day basis which affects the costing of the product.

4. The variable cost would not be more than USD 2 to 2.5 for the product since the retail pack size is only 400 gm. The mixing ratio is about 50 % of wheat grain, 20 % of soybeans, 10 % of rice; 10 % sugar and the rest of ingredients make up the balance 10 %. Hence, if wholesale market price for 200 gm of wheat grains, 80 gm of soybeans; 40 gm of rice and 40 gram of sugar is added together along with costs associated with ingredients for another 10 gm, the variable cost will not be more than USD 2 to 2.5 per pack.

5. The unit contribution margin would be USD 6 - 2.5 = USD 3.5 . The margin ratio is 3.5/6 * 100 = 58.33 %

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