3. Agenda
• Costing your product(s)
– Variable costs
– Fixed costs
– Breakeven analysis
– 5-line income statement
• Margins and pricing
– Margin vs. mark-up
– Margins in wholesale channels
– Calculating margins
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4. Our Case Study
Beth and Patrick farm in Norfolk County. Ten years ago
they decided to experiment with growing strawberries. The
experiment was a success and they became a popular
vendor at local farmers’ markets.
To help add value and extend their farmers’ market
season, Beth and Patrick starting making jam to sell. Last
year, their strawberry crop failed, so they bought
strawberries from another neighbouring farmer. This
allowed them to maintain their market stall and all their
loyal customers.
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5. Our Case Study
Throughout the season, Beth and Patrick decided that they
should focus on the jam-side of their business rather than
growing strawberries.
This year, they jumped in with both feet! They rented a
commercial kitchen (from a local church) and invested in
labelling, complete with a nutrition table so that they could
expand their market opportunities.
They have the capacity to make more jam than they’ve
ever made before, but are scratching their heads: should
they continue selling direct at more farmers’ markets or
should they explore wholesale customers as well?
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7. Variable Costs
• Costs that vary based on output or production.
• Variable costs for our jam business:
Variable Costs
Strawberries $ 0.38 per jar
Sugar $ 0.20 per jar
Pectin $ 0.04 per jar
Production labour $ 0.64 per jar
Jar & lid $ 1.22 per jar
Label $ 0.24 per jar
Total VC $ 2.71 per jar
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8. Fixed Costs
• Costs that are independent of production levels.
– Can and will vary, but not in direct relation to production.
– Stays consistent within a range of production
• Fixed costs for our jam business:
Fixed Costs
Facility rental $ 1,080 per year
Utilities $ 300 per year
Waste removal $ 50 per year
Non-production labour $ 4,000 per year
Promotions $ 500 per year
Farmers' market expenses $ 2,000 per year
Insurance $ 500 per year
Property taxes $ 1,000 per year
Depreciation $ 100 per year
Total FC $ 9,530 per year 8
Note: Adding diversified
activities to a farm
property can have a
significant impact on
property assessment.
Consult Municipal
Property Assessment
Corporation (MPAC) for
more information.
9. “But I’m not taking a wage…”
“We were driving to town anyways…”
• To build a sustainable business you need to be comprehensive in
estimating costs:
– Your time has value.
– Using vehicles has a cost, even if they have a different
primary purpose.
$20 + + = $20
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10. Breakeven
• The point at which revenue equals expenses and there is neither profit
nor loss.
• Sales are enough to cover variable costs AND all fixed costs.
• Note: At the farmers’ market the strawberry jam sells for $8 per jar.
Breakeven
Fixed Costs
Gross Margin or Contribution Margin
=
=
=
=
Fixed Costs
(Selling Price per Unit – VC per Unit)
$9,530
(Sellict – Vr Unit)$8 $2.71
1,802 jars of jam 10
17. What’s a Reasonable Price?
• Researching industry prices is a must, but
can be challenging.
– Online resources (such as organicpricetracker.ca
and Agriculture and Agri-Food Canada’s
Horticulture Wholesale Price Reports) can be a
useful starting point for unprocessed product.
– Chefs and retailers may be willing to tell you what
their distributor charges for a comparable product
or what that product is currently trading for at the
Ontario Food Terminal.
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18. Restaurants and Foodservice
Year: 2010 Average Canadian
Foodservice Operation
Revenue 100.0%
Cost of Goods Sold
(Food and Beverage Purchases) (36.0%)
Gross Margin 64.0%
Expenses:
Salaries and Wages (33.9%)
All Other Expenses (25.6%)
Total Expenses (59.5%)
Pre-tax Profit 4.5%
Source: Canadian Restaurant and Foodservices
Association 2012 Operations Report
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19. Grocery Stores & Retailers
Sample Independent, Full-Serve Grocer
Revenue 100.0%
Cost of Goods Sold (COGS) (75.0%)
Gross Margin 25.0%
Operating Expenses (23.0%)
Pre-tax Profit 2.0%
Local Fresh Produce
Revenue 100%
COGS (60%)
Waste (8%)
Gross Margin ~32%
Local Fresh Produce
High Probability of Damage
Revenue 100%
COGS (50%)
Waste (18%)
Gross Margin ~32%
Local Processed Product
Revenue 100%
COGS (70%)
Waste Minor
Gross Margin ~30%19
20. Food Distributors
Your Business
COGS: $2.50
Retail/Food
Service/Institutions
Pay Wholesale Price:
$5.56
Distributor
$5.56 x (1-30%) = $3.89
Pay Distributor Price: $3.89
Broker
$5.56 – ($5.56*10%) = $5.00
Pay Wholesale Price less
Commission: $5.00
Distributor
Expectation:
17-30% Margin on
Wholesale Price
Broker
Expectation:
5-10% Commission on
Net Invoice Price
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22. Price Variability
• Many factors can impact the price of a product, such as:
– Seasonality
– Supply (often impacted by weather)
– Demand
• A wholesale customer’s tolerance for price variation will depend on
their willingness and ability to pass changes along to their customers.
• Reasonable warning should always be given when prices are
changing.
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23. Back to Our Case Study…
• Beth and Patrick have been approached about two potential
opportunities with wholesale customers:
1. A local restaurant that serves all-day breakfast. Increasing, they are
trying to work with local producers which they promote to restaurant
patrons.
2. A local kitchen store that carries gourmet local food products. It is a
popular destination for locals and tourists.
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24. Assessing Options: Changing Costs
Option #1: Restaurant
• Willing to pay $6 per jar.
• Fixed costs expected to
fall to $6,800.
Option #2: Kitchen Store
• Willing to pay $5.60 per
jar.
• Fixed costs expected to
fall to $6,500.
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25. Assessing Options: Breakeven
Breakeven
Fixed Costs
Gross Margin or Contribution Margin
=
=
=
=
Fixed Costs
(Selling Price per Unit – VC per Unit)
$6,800
(Sellict – Vr Unit)$6 $2.71
2,068 jars of jam
=
=
$6,500
(Sellict – Vr Unit)$5.60 $2.71
2,251 jars of jam
Option #1: Restaurant Option #2: Kitchen Store
Expected Annual Order:
3,500 jars
Expected Annual Order:
4,000 jars
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27. Making a Decision
• Financial Considerations:
– Costs
– Prices
– Margins
– Volumes
– Breakeven
– Income Statement
• Other Considerations:
– Operations
– Marketing
– Human Resources
– Control
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28. Costing & Price is an Ongoing Exercise
• Business plans are living documents that should be revisited and
updated regularly.
• The same is true of costing and pricing analysis.
• For example, what is the significance of October 1st for costing
analysis?
– On October 1, 2016, Ontario’s minimum wage will rise from $11.25
to $11.40. Minimum wage is now tied to inflation, so the new rate
will be announced each April 1st to take effect that October.
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29. OMAFRA Resources
• OMAFRA Budgeting Tools:
– http://www.omafra.gov.on.ca/english/busdev/bear2000/Budgets/bu
dgettools.htm
– Cost of production information for livestock, field crops, fruits,
vegetables, specialty crops.
• OMAFRA Direct Farm Marketing Business Resources:
– http://www.omafra.gov.on.ca/english/busdev/directfarmmkt/
– Three margin calculators:
• Performance Analysis by Marketing Channel
• On-Farm Processing Recipe Based Costing Tool
• Cost of Meat Processing Tool
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30. Other Resources
• Farm Credit’s One Page Business and Financial Plans
– http://ngfn.org/resources/ngfn-cluster-calls/one-page-business-plan
• Farm Budget Database – Farm Management Canada
– Enterprise budgets for crop and livestock enterprises across Canada
– www.fmc-gac.com/farm-budget-database
• Market Information and Wholesale Price Reports (Infohort)
– http://www.agr.gc.ca/eng/industry-markets-and-trade/statistics-and-
market-information/by-product-sector/horticulture/horticulture-canadian-
industry/market-information-infohort/?id=1184695160057
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