A second espresso machine costs $3,800. Whether that is a bargain or a bonfire depends on one word your Daily Report prints every day.
Learning objectives. After this week you can (1) tell capital from labor; (2) find your binding constraint before investing; and (3) compute a payback period and judge it against the days left.
Remember this: buy capacity only where the line is.
1) Capital versus labor
Capital is a durable input you buy once and use for many days: machines, furniture, a renovation. A barista costs $16 for every hour worked. The second machine costs $3,800 once, plus a daily lease that joins your Fixed line and is due even on a dark day.
2) The binding constraint
Each hour you serve the smaller of what your machine can pull and what your crew can make. Your report names the limit on the Utilization line: machine-bound or labor-bound. Say the machine pulls 37 cups an hour and the crew could make 48: you serve 37, and the rest of a busy morning walks away. A fourth barista changes nothing. A second machine lifts the machine's limit, and then labor caps you at 48.
3) Payback
Payback Period = Investment ÷ Extra Daily Profit
Count only the extra customers the machine lets you serve. If 60 customers a day walk away while you are machine-bound, and your contribution margin is $2.50 a cup, the machine adds up to 60 × $2.50 = $150 a day. Payback = 3,800 ÷ 150 ≈ 25.3 market days, a little longer once its lease comes out. Then count the days left in your season: a machine that needs 25 days to repay itself with 15 days left loses money, however good the daily math looks.
4) Wear, upkeep and sunk costs
Capital wears out as it is used: depreciation. Maintenance spending is the upkeep that slows it, and your form warns what skimping does. A breakdown on your report is wear sending the bill. Once you have bought the machine, the $3,800 is a sunk cost: it should not change how you run the shop from then on.
Quick self-check
(a) A machine-bound shop would serve 40 more customers a day at a $2.00 margin. Payback on $3,800, before the lease? (b) Your report says labor-bound every day. What would a second machine add? (Answers: 3,800 ÷ 80 = 47.5, about 48 market days; no extra cups, because the crew is the limit.)
Common mistakes
- Buying capacity when nobody walks away. It earns nothing and still costs its lease.
- Counting all your profit in the payback. Only the extra customers count.
- Ignoring the calendar. A payback longer than the season left is a loss.
This week in the arena
Count your Daily Reports this week that say machine-bound and those that say labor-bound, and add up the customers who walked away on the machine-bound days. Work out the payback a $3,800 machine would have at your own contribution margin, then set it next to the market days left in your season.