cost control and the menu—determining selling prices and product mix
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Cost Control and the Menu—Determining Selling Prices and Product Mix. Controlling Foodservice Costs. 4. OH 4- 1. Chapter Learning Objectives. Determine a selling price based on various markup methods. Explain how market forces affect menu prices. - PowerPoint PPT PresentationTRANSCRIPT
OH 4-1
Cost Control and the Menu—Determining Selling Prices and Product Mix
Controlling Foodservice Costs
4OH 4-1
OH 4-2
Chapter Learning Objectives
Determine a selling price based on various markup methods.
Explain how market forces affect menu prices.
Explain how the menu product mix is used to determine the composite food cost of a menu.
Explain how the menu helps with food cost control.
OH 4-3
Menu Prices
If they are too high;
Sales suffer
If they are too low;
Profits suffer
OH 4-4
Menu Prices Should
Be directly related to costs
Help predict profitability
Serve as a cost control tool
Reflect realistic markups (the difference between a menu item’s cost and selling price)
OH 4-5
Pro Forma Income Statement as Budget Standard
OH 4-6
Industry Standards Restaurants typically run in the low to mid 30%
Italian - ~ 28% Multi Unit - ~ 32% American/Regional - ~35% Steak - ~ 40%
Prime Cost = 65% (some industry professionals like to see this nearer to 55%)
OH 4-7
Menu Pricing Methods
The Texas Restaurant Association (TRA) Markup Method
The Factor Method
The Markup on Cost Method
OH 4-8
The Texas Restaurant Association (TRA) Markup Method
Step 1 – Add target percentage values for labor, all other expenses (except food), and profit.
Example
Labor .25
All other expense (except food) + .30
Profit + .10
Total .65
OH 4-9
The Texas Restaurant Association (TRA) Markup Method continued
Step 2 – Subtract the total in Step 1 from 1.00.
Example
1.00
Total from Step 1 – 0.65
Divisor 0.35
OH 4-10
The Texas Restaurant Association (TRA) Markup Method continued
Step 3 – Divide the standard portion cost of the item by the divisor to obtain the menu selling price.
Menu item standard portion cost ÷ Divisor = Menu selling price
$4.10 ÷ 0.35 = $11.71
OH 4-11
The Texas Restaurant Association (TRA) Markup Method continued
The Texas Restaurant Association’s menu pricing formula considers labor costs when determining selling prices.
OH 4-12
The Factor Method
Determines menu prices based upon the standard (target) food cost percentage
Involves a two-step process
OH 4-13
The Factor Method continued
Step 1 – Calculate the appropriate factor using the following formula.
1.00 ÷ Standard food cost percentage = Factor
1.00 ÷ 0.35 = 2.86
OH 4-14
The Factor Method continued
Step 2 – Calculate the menu price using the following formula.
Factor x Menu item cost = Selling price
2.86 x $4.10 = $11.73
OH 4-15
The Markup on Cost Method
Is popular
Is easy to use
Menu item cost ÷ Standard food cost
percentage = Selling price
$4.10 ÷ 0.35 = $11.71
To calculate menu prices, use the following formula.
OH 4-16
Market Forces Affect Selling Prices
Menu prices can be affected by a variety of external forces, including
Competition
Price-value relationship
Mark-Up Differentiation
OH 4-17
Markups Affect Selling Prices
Different menu items are typically marked up by different amounts.
In general, the lower the menu item cost, the higher the markup (and the lower the food cost percentage).
OH 4-18
Menu Product Mix Is Important
Restaurants must achieve their standard (targeted) food cost percentage.
If a restaurant exceeds its food cost standard, profits will likely decline.
Menu items sell at a variety of cost percentages.
OH 4-19
Menu Product Mix Is Important continued
The average food cost percentage is determined by menu mix.
Menu mix significantly determines a restaurant’s food cost percentage target.
OH 4-20
Composite Food Cost Percent
Wrong way to determine average food cost percent
Menu Item # Sold Unit Cost
Total Cost Selling Price
Food Cost %
Total Sales
Hamburger 20 $2.00 $40.00 $5.95 34% $119.00
Fries 5 $0.50 $2.50 1.25 40% $6.25
Soda 10 $0.15 $1.50 .79 19% $7.90
Total 35 $44.50 $133.15
34+40+19=
93÷ 3 = 31% FC
OH 4-21
Composite Food Cost Percent continued
Menu Item # Sold Unit Cost
Total Cost Selling Price
Food Cost %
Total Sales
Hamburger 20 $2.00 $40.00 $5.95 34% $119.00
Fries 5 $0.50 $2.50 1.25 40% $6.25
Soda 10 $0.15 $1.50 .79 19% $7.90
Total 35 $44.00 $133.15
$44.50 ÷ $133.15 = 33% FC
Right way to determine is by weighted average food cost
OH 4-22
Menu Product Mix
It is not possible to add unweighted unit costs to determine average unit costs.
It is not possible to add unweighted food cost percentages.
A menu product mix spreadsheet helps determine the total (weighted) food cost percentage.
OH 4-23
Menu Product Mix Spreadsheet
Lists the names of all menu items sold
Lists the number of times each item has sold
Identifies the unit item cost of each item
OH 4-24
Menu Product Mix Spreadsheet continued
Lists each menu item’s selling price
Identifies the total cost of each item (number sold x item cost)
Lists the total sales achieved by each item (number sold x selling price)
OH 4-25
Menu Product Mix continued
The items that guests select have a significant impact on a restaurant’s weighted food cost percentage.
Menu Item Popularity Index is critical information
OH 4-26
Menu Item Popularity Index
Ratio of portions sold for a given menu item to total portion sales for all menu items
Key element in forecasting sales
Critical in menu evaluation
Popularity Index = Portion sales for item x 100Total portion sales of all menu items
OH 4-27
Menu Item Popularity Index
Menu Item Number Sold Popularity Index %
Strip Steak 145 23.4
Ginger Shrimp 116 18.7
Duck Breast 21 3.3
Lamb Chops 11 1.8
Pork Loin 45 7.3
Vegetarian Burrito 50 8.2
Veal Steak 120 19.4
Steak Diane 111 17.9
Total Covers 619 100%
OH 4-28
Menu Engineering (Contribution Analysis)
Method of menu evaluation or analysis Considers menu product mix
Considers contribution margin (selling price minus menu item food cost)
Considers popularity (number of items sold)
OH 4-29
Menu EngineeringMenu Item
Number Sold
Pop Index %
Food Cost
Selling Price
Item CM
Total Cost
Total Sales
Menu CM
Strip Steak 145 23.4 $7.50 $23.65 $16.15
Ginger Shrimp
116 18.7 $5.20 $18.00 $12.80
Duck Breast
21 3.3 $7.30 $21.50 $14.20
Lamb Chops
11 1.8 $6.90 $22.00 $15.10
Pork Loin 45 7.3 $6.30 $20.50 $14.20
Vegetarian Burrito
50 8.2 $3.80 $16.50 $12.70
Veal Steak 120 19.4 $6.35 $20.85 $14.50
Steak Diane
111 17.9 $7.75 $24.75 $17.00
619 100%
Average 77.38 12.5%
OH 4-30
Menu EngineeringMenu Item
Number Sold
Pop Index %
Food Cost
Selling Price
Item CM
Total Cost
Total Sales
Menu CM
Strip Steak 145 23.4 $7.50 $23.65 $16.15 $1087.50
Ginger Shrimp
116 18.7 $5.20 $18.00 $12.80 $603.20
Duck Breast
21 3.3 $7.30 $21.50 $14.20 $153.30
Lamb Chops
11 1.8 $6.90 $22.00 $15.10 $75.90
Pork Loin 45 7.3 $6.30 $20.50 $14.20 $283.50
Vegetarian Burrito
50 8.2 $3.80 $16.50 $12.70 $190.00
Veal Steak 120 19.4 $6.35 $20.85 $14.50 $762.00
Steak Diane
111 17.9 $7.75 $24.75 $17.00 $860.25
619 100% $4015.65
Average 77.38 12.5%
OH 4-31
Menu EngineeringMenu Item
Number Sold
Pop Index %
Food Cost
Selling Price
Item CM
Total Cost
Total Sales
Menu CM
Strip Steak 145 23.4 $7.50 $23.65 $16.15 $1087.50 $3429.25
Ginger Shrimp
116 18.7 $5.20 $18.00 $12.80 $603.20 $2088.00
Duck Breast
21 3.3 $7.30 $21.50 $14.20 $153.30 $451.50
Lamb Chops
11 1.8 $6.90 $22.00 $15.10 $75.90 $242.05
Pork Loin 45 7.3 $6.30 $20.50 $14.20 $283.50 $922.50
Vegetarian Burrito
50 8.2 $3.80 $16.50 $12.70 $190.00 $825.00
Veal Steak 120 19.4 $6.35 $20.85 $14.50 $762.00 $2502.00
Steak Diane
111 17.9 $7.75 $24.75 $17.00 $860.25 $2747.25
619 100% $4015.65 $13207.55
Average 77.38 12.5% 30.4%
OH 4-32
Menu EngineeringMenu Item
Number Sold
Pop Index %
Food Cost
Selling Price
Item CM
Total Cost
Total Sales
Menu CM
Strip Steak 145 23.4 $7.50 $23.65 $16.15 $1087.50 $3429.25 $2341.75
Ginger Shrimp
116 18.7 $5.20 $18.00 $12.80 $603.20 $2088.00 $1484.80
Duck Breast
21 3.3 $7.30 $21.50 $14.20 $153.30 $451.50 $298.20
Lamb Chops
11 1.8 $6.90 $22.00 $15.10 $75.90 $242.05 $166.10
Pork Loin 45 7.3 $6.30 $20.50 $14.20 $283.50 $922.50 $639.00
Vegetarian Burrito
50 8.2 $3.80 $16.50 $12.70 $190.00 $825.00 $635.00
Veal Steak 120 19.4 $6.35 $20.85 $14.50 $762.00 $2502.00 $1740.00
Steak Diane
111 17.9 $7.75 $24.75 $17.00 $860.25 $2747.25 $1887.00
619 100% $4015.65 $13207.55 $9191.85
Average 77.38 12.5% 30.4% $14.85
OH 4-33
Menu Engineering
Menu Item Pop Category CM CategoryMenu Item Class
Strip Steak H H Star
Ginger Shrimp H L Plow Horse
Duck Breast L L Dog
Lamb Chops L H Puzzle
Pork Loin L L Dog
Burrito L L Dog
Veal Steak H L Plow Horse
Steak Diane H H Star
OH 4-34
Menu Analysis
Contribution Margin
Pop
ula
rity
High
HighLow
H/L H/H
L/L L/H
OH 4-35
Other Menu Analysis Methods Miller Matrix
Same process but evaluate food cost and popularity Weighted food cost is factor Winners (similar to stars) = low food cost, high popularity Goal to achieve sales mix with 60% of items in low food
cost category
Cost Margin Analysis Combination of Miller Matix and Contribution Analysis Methodology includes evaluation of popularity,
contribution margin and food cost Primes (similar to stars) = low cost, high contribution
OH 4-36
Menu Management Decisions
Must consider more than just sales dollars, item popularity, and contribution margins Preparation and service costs
Restaurant’s image
Customers’ expectations
OH 4-37
The Pareto Principle
A few of the top selling menu items account for a large majority of sales in a category.
Removing the two or three least popular items in a category will not likely reduce the total sales of items in the category.
OH 4-38
Monitoring Menu-Related Concerns
Three factors must be considered and compared when analyzing food cost efficiency. Standard food cost percentage
Composite food cost percentage
Actual food cost percentage
OH 4-39
Monitoring Menu-Related Concerns continued
Standard food cost percentage The expected food cost percentage based upon the
approved operating budget or other benchmark.
Calculation
Total target food cost
÷
Total target food sales = Standard food
cost percent
OH 4-40
Monitoring Menu-Related Concerns continued
Composite (weighted) food cost percentage The percentage that results from the actual
food sales
Calculation
Actual food cost for menu items sold
÷Actual sales from menu items sold
= Composite food cost percent
OH 4-41
Monitoring Menu-Related Concerns continued
Actual food cost percentage Reported on the restaurant’s income statement
OH 4-42
Monitoring Menu Related Concerns continued
If the composite percentage exceeds the standard percentage, take steps to manage sales activity.
If the actual food cost percentage exceeds the composite percentage, take steps to improve food controls.
OH 4-43
How Would You Answer the Following Questions?
1. A composite food cost percentage is a (weighted/unweighted) average.
2. A menu product mix spreadsheet is designed to identify a restaurant’s composite food cost percentage. (True/False)
3. The menu pricing method that considers target profit in its computation is the
A. Factor methodB. Markup on cost methodC. Texas Restaurant Association (TRA) methodD. Yield percent method
4. Product mix has very little impact on the ability of a restaurant to achieve its standard food cost percentage. (True/False)
OH 4-44
Key Term Review
Composite food cost percentage
Factor method
Markup
Markup differentiation
Markup on cost method
OH 4-45
Key Term Review continued
Menu engineering
Menu product mix
Price-value relationship
Pro forma income statement
Texas Restaurant Association (TRA) markup method
OH 4-46
Chapter Learning Objectives— What Did You Learn?
Determine a selling price based on various markup methods.
Explain how market forces affect menu prices.
Explain how the menu product mix is used to determine the composite food cost of a menu.
Explain how the menu helps with food cost control.