In 2012, the price that Starbucks paid suppliers for its coffee increased. As a result, Starbucks raised the prices of its brewed coffee in some U. S. areas, including the Northeast and Sunbelt regions.1

When making the announcement about the upcoming price increase in 2012, management at Starbucks said that the coffee chain absorbed prior price increases in the cost of coffee by being efficient and cutting costs, and through sales growth. Starbucks has a high- end customer base, so it is less sensitive to price increases than many of its coffee competitors. Management said it did not think that its price increase would impact customer purchases.

Starbucks did not raise prices for its packaged coffee sold at grocery stores and at Starbucks stores, because sales of the packaged coffee have a greater effect on profit mar-gins. The coffee purchased from suppliers represents a bigger portion of the cost of pack-aged coffee than of brewed coffee. Starbucks says that its retail stores have more tools to absorb the increase because of the other costs included in the cost of a cup of coffee.

Requirements

1. Would you consider Starbucks to be a service company, a merchandiser, a manufacturer, or some combination thereof? Support your answer with specific examples.

2. Describe the value chain for a cup of coffee at Starbucks. Use your imagination and brainstorm possible costs at each phase of the value chain.

3. Think about a Starbucks café in Fairlawn, Ohio, and a cup of coffee served and consumed in that café.

a. What costs would be included in the cost of a cup of coffee served in the café? Separate these costs into direct materials, direct labor, and overhead costs.

b. What are the direct costs of a cup of coffee, assuming that the cost object is the Fairlawn location? What are the indirect costs of that same cup of coffee for the Fairlawn location?

c. Assume now that the cost object is the Starbucks corporation itself. What costs of that cup of coffee will now be reclassified as direct ( as compared to using the Fairlawn location as the cost object)?

4. Now think about a Starbucks café in Fairlawn, Ohio, and a pound of packaged ground coffee sold in that café (assume that the beans are ground in the store at the time of sale).

a. What costs are included in the cost of a pound of packaged ground coffee sold at the Fairlawn location? Separate these costs into direct materials, direct labor, and overhead costs.

b. What are the direct costs of a pound of packaged ground coffee (to be sold to consumers), assuming that the cost object is the Fairlawn location? What are the indirect costs of that same pound of packaged ground coffee for the Fairlawn location?

c. Assume now that the cost object is the Starbucks corporation itself. What costs of that packaged ground coffee will now be reclassified as direct (as compared to using the Fairlawn location as the cost object)?

5. Consider the costs of a cup of coffee versus the costs of packaged ground coffee. Why does Starbucks management state that its retail stores “have more tools to absorb the increase because of other costs included in the cost of a cup of coffee”? What are these costs?