Popsicle

Peeps

Krista McAllester
Anne Shields

Introduction
This Fully Allocated Cost Project was performed in order to completely predict
and estimate the cost of producing a product. In this case, the production of
Fruit and Yogurt Popsicles by Popsicle Peeps was analyzed in terms of several
cost factors including:

Monetary Costs
Social Costs
Environmental Impact
Profitability Forecast
) To analyze these specific cost factors, various tools learned in IME 239
and IME 223 were implemented. Our team, Popsicle Peeps, utilized direct
time studies, financial statement analysis, process map analysis, and other
lean manufacturing techniques. Thorough cost analysis in areas of raw
material, direct labor, and overhead also proved significant in our mission to
calculate the Fully Allocated Cost for Fruit and Yogurt Popsicles.
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Popsicle Peeps Popsicles

) Our Fruit and Yogurt Popsicles:
Our popsicles use simple and wholesome ingredients to give customers a
sweet and satisfying dessert they wont regret afterwards. We are also
considering honey as a future, healthier alternative to our popsicles after our
capital has grown. For the purpose of this project, we will only be making
mixed berry popsicles, although a variety of popsicle fruit flavors would likely
be a small business requirement to meet customer demands.

So what are our Popsicles made out of?:

Our popsicles will be a chunky blend of blueberries, strawberries, raspberries,

and blackberries thickened by reduced fat vanilla yogurt. After sufficient
freezing, it will be placed in a small ice cream cart that moves along high
populated public areas, like parks and street corners. The popsicles are
presented only on a stick, to ensure customers of their freshness.

Our Popsicle Process:

Assumptions:
There will be no defect or scrapped ingredients.
When making a popsicle, place correct proportions for one batch size in the
blender and immediately blend until the desired thickness is reached. Then
transport the goods to the trays and pour the blend into each cup till it is
full. Afterwards, place the lid on the tray and place a single popsicle stick into
each allotted stick slit. Finally place the batch or batches into the freezer,
which will take approximately 5 hours to freeze. Preparation is now
complete and the popsicle is ready to be served to the customer!

Monetary Cost
Variable Costs
Variable costs are costs that change depending on the level of a company's
production output, such as the cost of raw materials or utilities. Because we
are a very small business, with low production, we will try to maintain
competitiveness by minimizing our input costs.
Assumptions:
All our ingredients will be bought in bulk at Costco or other cheaper
grocery stores
Tools, like blenders, molds, etc. will also be purchased from discount
retail stores or seasonal sales
Our popsicles will be produced in batches of 6 because the mold used
in production and freezing is comprised of 6 individual popsicle molds.

Table 1: Costs of Raw Material

Material

Quantity

Frozen mixed
berries

14.4 cups

Cost in $
$8.99

Source of the
price
costco.com

Vanilla yogurt

8 cups

$5.99

costco.com

White sugar

9 cups

$2.35

costco.com

Popsicle sticks

500 count

$8.99

target.com

Total

$28.32

Table 2: Cost of Direct Materials per batch

Direct Material Quantity per
batch

Cost in
$/batch

Frozen mixed
berries

2 cups

$1.24

Vanilla yogurt

2 cups

$1.49

White sugar

0.25 cups

$0.07

Popsicle sticks

6 count

$0.11

Total Cost

$2.91

Table 3: Cost of Direct Materials per popsicle

Direct Material

Quantity per
popsicle

Frozen mixed
berries

0.3333 cups

$0.21

Vanilla yogurt

0.3333 cups

$0.25

White sugar

0.0417 cups

$0.01

Popsicle sticks

1 count

$0.02

Total Cost

Cost in
$/popsicle

$0.49

Direct Labor Cost

Producing these popsicles requires introductory training but no special skill
sets. They are very simple to make, which allows the direct labor costs to
remain low. To obtain an accurate estimate of direct labor costs, we
conducted a time study using cyclic work elements. We also included labor
time allowances recommended by the International Labor Organization (ILO).
Our applicable allowance factors include:
Constant allowance: Personal allowance (5%), Basic fatigue allowance
(4%)

 Variable allowance: Standing allowance (2%)

The Net Direct Labor Time, after allowances are accounted for, is
calculated as:
Net Direct Labor Time=Normal Time * (1+allowance)
The assumptions for our calculation of Direct Labor Costs are as
follows:
Worker receives minimum wage of $10.00/hr.
Miniscule operations such as opening bags, containers, breaking
popsicle from tray, etc., are negligible.
Freeze time was neglected because it is not a component of direct
employee labor
Taxes are calculated to be 1.2075% for employee costs
The equations used to convert labor time to costs per a popsicle are
as follows:
Direct Labor Cost: (x min)*(hr/60min)*($10/hr)= $/batch
Table 4: Direct Labor Costs
Direct Labor
Element

Normal Time
(min)

Net Time
(min)

Transport materials to .573

counter

.64

Add fruit to blender

.208

.23

Add yogurt to blender

.143

.16

Add sugar to blender

.055

.06

Blend

1.00

1.11

Pour contents into

mold

2.38

2.64

Insert popsicle sticks

.08

.088

Place mold in freezer

.30

.33

Give popsicle to
customer

.12

.133

Total:

4.86

5.39

Cost
($/batch)

$.89

Our total variable costs per batch are: 2.91 + .89 = $3.80
Our total variable costs per popsicle are: 0.49 + 0.14 = $ 0.63

Fixed Costs
Fixed costs are expenses that are not dependent on level of output and
typically remain constant over long periods of time. Although many fixed
costs cannot be avoided for production, such as rent and utility costs, the
equipment costs can greatly influence monetary cost analysis. We chose
highly rated products like Nelson CLT-6NR (Ice Cart) and Ninja Blender in
order to maximize our production levels. Costs for the equipment are
sourced from manufacturer's websites.
The assumptions for our Equipment Cost calculations are as follows:
All equipment uses straight-line depreciation.
Assume salvage value for the cart and freezer.
Table 5: Equipment Costs
Equipm
ent

Lifeti
me

Cost in
$

Ice Cart

15

$979.00

Blender

$79.97

Freezer

15

$508.00

$12.99

Mold
Total

Salvage
Value

Calculatio
n

Depreciation
per year

100 (979-100) /
15
0 (79.97-0) /
5
50 (508-50) /
15
0 (12.99-0) /
2

$1579.
96

58.60
15.99
30.53
6.45
$111.62

The total fixed costs are the costs in one year of operation.
Table 6: Total Fixed Costs
Investment
Depreciation of equipment

Cost in $
$111.62

Utilities

$2000

Rent

$1200

Total Fixed Costs

Break Even Analysis

$3311.62

The Break Even Point is the revenue or the quantity of a product we have to
sell to break even. It is the point where total benefits equal total cost.
Our cost function is:
TC(v)= Cv * v + Cf
TC(v)=.63 * v
+3311.62
Our revenue is:
TR(v)=P * v
TR(v)=1.25 * v
BEP:
TR(v)=TC(v)
v=.63 * v +
3311.62=1.25 * v
v=5341.32
Where:
TR
Total Revenue
TC
Total Cost
V
Volume
P
Sales price
Cv
Variable cost
Cf
Fixed cost
If we sell 5342 popsicles in a year, we break even and our business is
profitable.

Product Cost
The product cost of one popsicle is determined by the costs of direct
material, direct labor and overhead. The overhead costs are all the indirect
costs of the product, divided by the amount of popsicles sold in one year. The
indirect costs are the fixed costs, in the company's case. Popsicle Peeps is
still in the beginning stages of production, so overhead is calculated in the
traditional methodno allocation of the overhead was necessary.
Assumptions:
30 popsicles are sold per day for one year
Overhead calculation: 3311.62 / (30*365) = .30
Table 6: Total Product Cost
Cost Type

Cost in
$/popsicle

Direct Material

$0.49

Direct Labor

$0.14

Overhead

$0.30

Total Product Cost

$0.93

Competitor Comparison
After our total production cost was calculated we found it necessary to
compare our total cost to the major competitors in the popsicle industry. One

of the lead competitors, Dreyer's, has a popsicle branch named Outshine

that manufactures fruit bars for a total production cost of approximately
$0.35. Their significantly lower manufacturing costs are probably due to
vertical integration. Dreyers buys fruit, milk, and sugar at wholesale prices
instead of retail, which could reveal a huge reduction in raw material cost.
Furthermore they employ their laborers with minimum benefits for
manufacturing and use major supermarkets as their sellers. These would
also incur huge reductions in direct labor costs per popsicle. In contrast, their
overhead costs, which most likely include advertising, marketing, higher
human resources etc. are much higher than our small business costs are.

Environmental Analysis
Current Popsicle Packaging Methods
Popsicle Peeps have made every step in the packaging process to be
environmentally conscientious. These popsicles do not have any wrappers
attached to them; they are sold fresh from the cart to the customer.
Furthermore, we will be hand wheeling the cart around the high pedestrian
areas during selling hours, requiring no gasoline. Popsicle sticks, made of
wood, are biodegradable and made from recycled materials. They more
environmentally friendly compared to paper or plastic cups as an alternative.

Transportation Costs (Ice Cart)

Our cart will use a cold plate freezer, which uses steel plates containing a
network of tubing (full of a liquid solution) to electronically insulate the
popsicle at low temperatures. Cold plates need to be electronically charged
for 10-12 hours to give a 12-hour selling day (at 90 degrees inside). An
alternative comparison would be dry ice cooling systems. These systems are
more environmentally friendly because they require no electricity, and the
CO2 used in dry ice is often reclaimed or recycled: it can be source from the
CO2 that already exists in the atmosphere, or from the CO2 byproduct from
oil/gas production. The decision to choose cold plate freezers was a fiscal,
not an environmental, decision. Steel plate cooling has a lower operating
cost, longer working life span, and usually fewer maintenance requirements
(resulting in less down time). The operational benefits of a cold plate freezer
ice cart outweigh the higher cost of a dry ice cooling system and the
potential environmental benefit.

Figure 1-Process Map

Most Wasteful Process

The process map identifies several steps, especially during manufacturing

that result in waste. In order to minimize this waste, The Popsicle Peeps must
ensure no wastes results from:
Spillage of ingredients during preparation
Unused, expired ingredients
Incorrect cooling of ingredients: especially important in ice cart because
melted product will result in clean up (which equates to downtime)
Minimizing waste of ingredient in the molds
Fortunately, Popsicle Peeps have entirely separated the manufacturing and
retail processes. By focusing on the creation of popsicles during non-selling
hours, Popsicle Peeps will be able to minimize probability of spills. Selling
popsicles also has less pressure to meet time demands as other food
businesses (such as conventional restaurants), and therefore less waste will
result from packaging leftover.
In order to make sure no unnecessary waste occurs, Popsicle Peeps want to
ensure that we take no temperature short cuts that will result in waste from
melted material. We also must use EXACT measurement techniques to
standardize the amount used per batch. This will subsequently minimize
waste by ensuring not too much or too little of ingredients are used at any
manufacturing step. Popsicle Peeps must also continuously evaluate its

process map using 5S and kaizen methodology, especially when the

company looks to expand the menu or output.

Most Energy Waste

From the process flow map it is identified that the most wasteful
manufacturing step will come from adding yogurt. Yogurt requires the most
raw materials, must be continuously cooled throughout the entire process,
and uses thicker plastic containers for packaging. Furthermore, the bulk sizes
are lesser for yogurt than it is for either fruit or sugar. Unless a change of
supplier is found at a later date, no progression can be made.
Another major energy waste will be the charging of the cart and the cooling
of the popsicles, which are both major consumers of electrical energy.
Popsicle Peeps have standardized the freeze time on popsicles as well as the
charge time on the battery. Both of these can also only see improvement
through upgraded (inevitably more costly) equipment. Unfortunately, with
current projections, upgrades will not be possible in the near future

Social Costs
Employees Matter

Popsicle Peeps is a company that believes that their employees are part of
what makes its popsicles so special. The team behind Popsicle Peeps is vital
to its overall profitability and success as a business. Therefore, employees at
Popsicle Peeps perform in a working environment of only the highest quality.
Numerous benefits and resources for our employees include:
Breaks: 15 minute shift breaks and 30 minute lunch breaks
One free popsicle per shift
Flexible hours
Freedom to work in different locations
In-depth training sessions
Friendly and approachable management
Popsicle Peeps hopes to create a team of employees that are more than just
coworkers-they are your peeps!

Community First
Popsicle Peeps strives to make a positive impact in the greater San Luis
Obispo community as a thank you to our valued customers. Our goods are
produced locally and made from local ingredients whenever possible. We are
always striving to find ways to use new organic ingredients as kudos to our
Central Valley farmers. The nomadic nature of our business allows us to
serve you in many family friendly and community-oriented areas. Popsicle
Peeps is a proud regular at the San Luis Obispo Farmers Market and our
vendors can be found at various parks and beaches on the weekend. Our

main mission as a business is to provide a wholesome and natural dessert

that our customers will love, while staying true to the fun-loving and carefree
San Luis Obispo environment.

Forecast and Income Statement

Assumptions:
Used direct time study data
Work days per year: 365
Tax Rate: 30%
Interests costs per year: 300
Sales price and volume
Table 7: Sales Price and Volume Forecast
Year

Sales per Day

Sales per Year

Price ($)

2016

30

10950

1.25

2017

33

12045

1.25

2018

35

12775

1.30

2019

38

13870

1.40

2020

41

14965

1.50

Income Statement for the next five years:

Year

2016

2017

2018

2019

2020

10950

12045

12775

13870

14965

Revenue

13687.5

15056.25

16607.5

19418

22447.5

COGS

10183.5

11201.85

11880.75

12899.1

13917.45

3504

3854.4

4726.75

6518.9

8530.05

25.60%

25.60%

28.46%

33.57%

38.00%

Operating
Expense

2265

2265

2265

2265

2265

Human

1005

1005

1005

1005

1005

Volume

Gross Profit
GM %

Resources
Finance

1260

1260

1260

1260

1260

Operating
Income

1239

1589.4

2461.75

4253.9

6265.05

9.05%

10.56%

14.82%

21.91%

27.91%

Interests Costs

300

300

300

300

300

Profit Before
Tax

939

1289.4

2161.75

3953.9

5965.05

Taxes

281.7

386.82

648.525

1186.17

1789.515

Net Income

657.3

902.58

1513.225

2767.73

4175.535

OI%

NI%
4.80%
5.99%
9.11%
14.25%
18.60%
Figure 2: Income Statement
The income statement above forecasts the next five years, based on wide
assumptions we had made. We assume an increasing production output and
subsequent higher price to meet market demands, which we assume will
increase. Further assumptions are made that operating expenses remain
stable despite this business expansion. Realistically, it is likely price,
demand, and raw material/direct labor costs will vary throughout years. For
these reasons, projected values are rough estimates. However, this template
serves as an easy calculation to see if we will have a positive net income
after taxes. It also can identify points of contact to increase NI% over the
next five years, giving us potential to expand this popsicle business.
When comparing our financial plan to other major popsicle producers, it is
easy to see that we are a very small entity within the frozen dessert market.
Our company is simply not at the high manufacturing and retail levels as our
competitors, such as Dreyer's. However, when we look at our business on a
micro-scale, it is realized that Popsicle Peeps in the leader for local and
natural popsicles in San Luis Obispo. Once accomplished, our five-year plan
may provide lead way for expansion into nearby cities. It will only be at that
time, however, when we can begin to compare our financial growth to other
major companies. For now, they serve as a business model and tool for
Popsicle Peeps future endeavors.

Industrial Engineering Tool

The 5S

1.
2.

3.
4.
5.

After conducting direct time study, we were able to reduce waste from
human mistake by methods of standardization.
Sorting: We got rid of unneeded kitchen equipment and created designated
shelving for our raw materials and completed units (popsicles).
Stabilize: We assigned different countertops to complete separate tasks
during the manufacturing process (i.e.: adding countertop, blending
countertop, pouring countertop).
Sweeping: Ensured during training and through inspection that workstation
was kept clean and orderly.
Standardize: Preserve the first 3S. Standardized the measuring equipment
at scooping station as well set a blend time on blender.
Self-Discipline: Maintain standards through cohesive and positive culture.
Lead through example as a manager, owner, or partner.