TOPIC 2: Menu cost and Pricing Strategies

When planning menus, managers must consider guests and financial goals of the foodservice

operation. After managers know standard product costs for food and beverage items, they

know how much it should cost to produce each item.

COST CONCEPTS

The food and beverage business, cost is defined as the expense to a foodservice establishment

for goods or services when the goods are consumed or the services are rendered. Foods and

beverages are considered “consumed” when they have been used, wastefully or otherwise, and

are no longer available for the purposes for which they were acquired. Thus, the cost of a piece

of meat is incurred when the piece is no longer available for the purpose for which it was

purchased, because it has been cooked, served, or thrown away because it has spoiled, or even

because it has been stolen.

The cost of labor is incurred when people are on duty, whether or not they are working and

whether they are paid at the end of a shift or at some later date.

The cost of any item may be expressed in a variety of units: weight, volume, or total value. The

cost of meat, for example, can be expressed as a value per piece, per pound, or per individual

portion. Labor costs can be expressed as value per hour (an hourly wage, for example) or value

per week (a weekly salary).

SALES CONCEPTS

Sales Defined

In general, the term sales are defined as revenue resulting from the exchange of products and

services for value. In our industry, food and beverage sales are exchanges of the products and

services of a restaurant, bar, or related enterprise for value. We normally express sales in

monetary terms, although there are other possibilities. Actually, there are two basic groups of

terms normally used in food and beverage operations to express sales concepts: monetary and

nonmonetary.

• Total Sales is a term that refers to the total volume of expressed in dollar term for instant

any given period, such as a week, a month or a year.

• By Category. Total dollar volume of sales by category is total food sales or total beverage

sales. Or total steak sales or seafood sales.

• By Server. This is total dollar volume of sales for which a given server has been responsible

in a given period. This is to help the management to make judgment on employees

performance.

• By Seat. Usually for a year period. Total Dollar sales divided by the number of seats in the

restaurant.

• Sales Price refers to the amount charged each customer purchasing one unit of a particular

item. It can be a single meal or entire meal.

• Average Sale in business is determining by adding individual sales to determine a total and

then dividing that total by the number of individual sales. Two types of commonly

calculated averages are: average sale per customer and average sale per server.

• Per Customer is the result of dividing total dollar sales by the number of sales or customer.

• Per Server is total dollar sales for an individual server divided by number of customer

served by that individual.

This average is determined as follows:

Average check = Total dollar sales ÷ Total number of covers

Total sales of $3,902.30 and 140 covers; Thus, Average sale = $3,902.30 ÷ 140 = $27.87

Yasser, one of the servers, had 30 customers and total dollar sale of $565 on the

Saturday night of February 13, average sale per server for Jim would be calculated as

follows:

Average sale = Total sales for Yasser ÷ No. of customers for Yasser

= $565 ÷ 30

= $18.83

THE COST-TO-SALES RATIO

Foodservice establishment calculate cost in dollars and compare those cost to sales in dollars.

This enables them to discuss the relationship between cost and sales or the cost per dollar of

sale.

Cost ÷ Sales = Cost per dollar of sale

Decimal answer and any decimal can be converted to a percentage if one multiplies it by 100

and adds a percent sign (%).

Cost ÷ Sales x 100 = Cost%

$ 312,090 ÷ $ 891,687 = .35 and .35 x 100 = 35.0 %

Food cost ÷ Food sales x 100 =Food cost%

Beverage cost ÷ Beverage sales x 100 = Beverage cost%

Labor cost ÷ Total sales x 100 = Labor cost%

The formula also can be used to determine the Sales price if the cost% is known.

Cost ÷ cost% = Sales (or Sales Price)

If the given cost percentage were 30.0 percent and the food cost for the item were $3.60, the

appropriate sales price would be $12.00, illustrated here

30.0 % ÷ 100 = 0.3

$ 3.60 ÷ 0.3 = $12.00

The formula also can be used to determine the cost if the spending power and cost% is known.

Suppose this banquet manager is dealing with a group willing to spend $15.00 per person for a

banquet, and the same given 30.0 percent cost percent is to apply. Calculation of the maximum

permissible cost per person is facilitated by rearranging the formula once again:

Sales x Cost % (expressed as a decimal) = Cost

Sales X Cost % = Cost

So the cost per person can be calculated as $4.50:

30.0 % ÷ 100 = 0.3

$ 15.00 X 0.3 = $ 4.50

QUIZ

1. Given the following information, calculate cost percentages. Round your answers to the

nearest tenth of a percent.

a. Cost, $200.00; Sales, $500.00

b. Cost, $150.00; Sales, $500.00

c. Cost, $178.50; Sales, $700.00

d. Cost, $216.80; Sales, $800.00

2. Calculate cost, given the following figures for cost percent and sales:

a. Cost percent, 28.0%; Sales, $500.00

b. Cost percent, 34.5%; Sales, $2,400.00

c. Cost percent, 24.8%; Sales, $225.00

d. Cost percent, 31.6%; Sales, $1,065.00

3. Calculate sales, given the following figures for cost percent and cost:

a. Cost percent, 30.0%; Cost, $90.00

b. Cost percent, 25.0%; Cost, $500.00

c. Cost percent, 33.3%; Cost, $1,000.00

d. Cost percent, 27.3%; Cost, $1,300.40

4. Calculate the average check from the following data:

a. Sales, $1,000.00; Number of customers, 125

b. Sales, $1,300.00; Number of customers, 158

c. Sales, $8,720.53; Number of customers, 976

d. Sales, $ 8911.50; Number of customers, 360

To reach this goal, it is necessary to develop the following standards and standard procedures

for each menu item:

1. Standard portion size

2. Standard recipe

Standard Portion Size

One of the most important standards that any foodservice operation must establish is

the standard portion size, defined as the quantity of any item that is to be served each

time that item is ordered. In effect, the standard portion size for any item is the fixed

quantity of a given menu items that management intends to give each customer in

return for the fixed selling price identified in the menu. It is possible and desirable for

management to establish these fixed quantities in very clear terms. Every item on a

menu can be quantified in one of three ways: by weight, by volume, or by count.

Every item on a menu can be quantified in one of the three way:

By Weight, can be expresses in ounce or grams used to measure portion sizes for a

number of menu items.

By Volume, Is used as the measure for portion of many menu items usually that of

liquid in nature, Milk, soup, juices of coffees

By Count, Used to identify portion size, such as sausage, eggs and shrimps

Advantages for practicing Standard Portion Size

1. It helps reduce customer discontent as the customer cannot compare his or her portion

unfavourably with that of other customer and feel dissatisfied or cheated.

2. It helps to eliminate animosity of miscommunication between the kitchen staff and the

server over the portion size that lead to delay in the serving of food.

3. It helps to eliminate excessive costs of over portioned menu.

4. Price on the menu is usually fixed, thus it will also reflect the portion size of the menu. If

the portion size is constantly change then it will dissatisfied the customer and server.

Standard Recipes

A standard recipe is a formula for producing food or beverage item. It specifies the required

quantity of each ingredient, preparation procedures, portion size and portioning equipment,

garnish, and any other information necessary to prepare the item. The single most important

advantage of using standard recipes is consistency. Other advantages of using standard recipes

include the following:

More efficient purchasing practices result when managers know the exact amounts of

ingredients necessary to produce menu items.

Reduces the possibility of producing too many or too few items.

Managers can more effectively schedule food production employees and equipment.

Less supervision is required; eliminating guesswork.

If the chef or bartender is ill, other employees can still produce food items by following

the standard recipes.

Using a standard recipe does not require that the recipe be physically in the work area during

production times.

Figure 1 Standard Recipe

Developing Standard Recipes

Developing standard recipes requires standardizing existing recipes according to a series of steps.

Managers should select a time period for standard recipe development. The recipes should be recorded

in a standard format that will be helpful to those preparing the items. For example, managers could do

the following:

Decide on the desirable yield.

List all ingredients in the order used.

Decide whether to use weights or measures or both.

Record procedures in detailed, concise, and exact terms.

Provide directions for portioning.

After drafts of the standard recipes have been developed, share them with other production staff.

Finally, test the recipes to be certain they yield products of the desired quantity and quality. After

successful testing, the recipe may be considered standardized. Despite the advantages of using

standardize recipes, there may be some difficulties when implementing them. Employees who have

never used standard recipes may have negative attitudes about them. Cooks or bartenders may feel

that they can no longer be creative in the kitchen or behind bar. These concerns, however are minor

when compared to the points already noted in favour of using standard recipes. When standardizing a

recipe, ensure that all required ingredients will be available as long as the menu is used. All recipes must

be tested. When standardizing recipes from external sources, it is important to address operating

concerns. Production and management staff must agree that the recipe is concise, accurate, and

readable with regard to the following:

Amounts of ingredients

Types of ingredients

Production and portioning procedures

Service procedures

This agreement will ensure efficient use of time and energy and help eliminate human error as much as

possible.

Adjusting Standard Recipe Yields

The yield from a standard recipe can be easily increased or decreased through the use of an adjustment

factor, which is determined by dividing the desired yield by the original yield. For example, if a recipe

yields 100 portions, and you want 225 portions of the same size, the adjustment factor would be

calculated as follows:

Adjustment Factor = 225 portions (desired yield)

= 2.25 100 portions (original yield)

Each recipe ingredient is then multiplied by the adjustment factor to determine the amount required for

the desired yield. For example, if the original recipe required 8 ounces of sugar, the adjusted quantity

would be:

New Amount = 8 oz

X 2.25

= 18 oz (original amount) (adjustment factor)

A similar process can be used to produce the same number of portions with a different portion size.

Assume a recipe yields 40 12-ounce portions and 40 8-ounce portions are required:

Desired Portion = Adjustment Factor

Original Portion

8 oz = 0.67

12 oz Each ingredient in the original recipe can now be multiplied by this factor to determine the quantity of

ingredients needed for the required yield. Assume the recipe requires 20 pounds of ground beef to

yield 40 12-ounce servings, and 40 8-ounce portions are needed.

New Amount = 20 lb

X 0.67

= 13.4 lb (original amount) (adjustment factor)

A recipe can also be adjusted when both the number of portions and the portion size change. For

example, if a recipe yields 50 4-ounce servings and the desired yield is 75 6-ounce servings, the

adjustment factor would be:

Total Volume of Desired Yield X Adjustment Factor

Total Volume of Original Yield

Total Volume of Desired Yield = 75 portions X 6 oz/portion = 450 oz

Total Volume of Original Yield = 50 portions X 4 oz/portion = 200 oz

450 oz = 2.25

200 oz

Determining Standard Portion Costs for Menu Items

After standard recipes and standard portion sizes have been established, standard portion

costs for individual portions or entire dinners can be calculated. A portion cost is the cost o

food incurred by preparing one portion of a menu item according to its standard recipe. By

contrast, total meal costs are calculated for items that are combined form meals that are

priced and sold as one menu selection.

Calculating a Standard Portion Costs

A portion cost is determined by dividing the sum of the recipe’s ingredient costs by the number

of portions that the standard recipe yields. For example, if the food cost to prepare a recipe is

$75.00 and yields 50 portions, the portion cost for that item is $1.50 ($75.00/50 portions). This

can be considered as pre-costing.

Pricing Menu Items

Commercial foodservice operations and many non-commercial facilities must establish selling

price for menu items. Prices affect guests’ perception of value. Consider the following

methods, and notice that each is based upon the manager’s guesses about selling prices:

The reasonable-price method. This method uses a price that the foodservice managers

think will represent a value to the guest.

The highest-price method. The manager sets the highest price that he/she thinks guests

are willing to pay.

The loss-leader price method. An unusually low price to set for an item (or items). The

manager assumes that guests will order the low-priced item(s) and will order other

items as well.

The intuitive-price method. When prices are set by intuition, the manager takes little

more than a wild guess about the selling price.

Desired Food Cost Percentage Mark-up

Some managers price menu items by using a desired food cost percentage. Assume that a

portion of food cost $1.50. The menu selling price is then determined by dividing the items’

standard portion cost by its desired food cost percentage:

Selling Price = $1.50 (item's standard portion cost)

= $4.55 rounded 0.33 (desired food cost percentage)

Profit Pricing

The profit pricing method ensures that profit requirements and non-food expenses are

factored into the pricing decision. Assume an operation offers foodservice only and the budget

prepared for the upcoming year forecasts food revenue at $800,000, estimates non-food

expenses at $415,000, and indicates that the owners requires a profit of $75,000. The

allowable food cost for the year can be determined as follows:

Allowable Food Costs

= $800,000

(forecasted food revenue)

- $415,000 (nonfood

expenses) -

$75,000 (profit

requirements) = $310,000

Once allowable food costs are determined, a budgeted food cost percentage can be calculated

simply by dividing allowable food costs by forecasted food revenues:

Budgeted Food Cost

Percentage =

$310,000 (allowable food costs)

= 0.388 (39%

rounded) $800,000 (forecasted food revenues)

The selling price of the menu can then be determined by dividing the item’s standard food cost

by the budgeted food cost percentage.

Competition and Pricing

One of the most important concerns in pricing decisions relates to your competition. To price

menu items effectively, you must know your competitors’ menus, selling prices, and guest

preferences. One way to attract customers from competitors is to lower menu prices.