OH 4-1

Agenda

• Review quiz from Chapter 2 • Chapter 4 – Cost Control and the Menu • Quiz Chapter 4

4

Cost Control and the Menu—Determining Selling Prices and Product Mix

 Controlling Foodservice Costs

OH 4-3

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 4-4

Menu Prices

 If they are too high;  If they are too low; Sales suffer Profits suffer

OH 4-5

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 4-6

Pro Forma Income Statement as Budget Standard

OH 4-7

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 4-8

Menu Pricing Methods

 The Texas Restaurant Association (TRA) Markup Method  The Factor Method  The Markup on Cost Method

OH 4-9

The Texas Restaurant Association (TRA) Markup Method Step 1 –

Add target percentage values for labor, all other expenses (except food), and profit.

Example

Labor All other expense (except food) Profit Total + + .25

.30

.10

.65

OH 4-10

The Texas Restaurant Association (TRA) Markup Method continued Step 2 –

Subtract the total in Step 1 from 1.00.

Example

Total from Step 1 Divisor 1.00

– 0.65

0.35

OH 4-11

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

The Texas Restaurant Association (TRA) Markup Method continued

OH 4-12 The Texas Restaurant Association’s menu pricing formula considers labor costs when determining selling prices.

OH 4-13

The Factor Method

 Determines menu prices based upon the standard (target) food cost percentage  Involves a two-step process

OH 4-14

The Factor Method continued Step 1 –

Calculate the appropriate factor using the following formula.

1.00

÷ Standard food cost percentage 1.00 ÷ 0.35

= Factor = 2.86

OH 4-15

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 4-16

The Markup on Cost Method

 Is popular  Is easy to use To calculate menu prices, use the following formula.

Menu item cost $4.10 ÷ 0.35

= Selling price = $11.71

OH 4-17

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 4-18

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 4-19

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 4-20

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 4-21

Composite Food Cost Percent

 Wrong way to determine average food cost percent Menu Item Hamburger Fries Soda Total # Sold Unit Cost 20 $2.00

5 $0.50

10 $0.20

35 Total Cost Selling Price $40.00

$5.95

$2.50

$2.00

$44.50

1.25

.79

Food Cost % Total Sales 34% $119.00

40% 25% $6.25

$7.90

$113.15

34+40+25= ÷ 99 3 = 33% FC

OH 4-22

Composite Food Cost Percent continued

 Right way to determine is by

weighted

food cost average Menu Item Hamburger Fries Soda Total # Sold Unit Cost 20 $2.00

5 $0.50

10 $0.20

35 Total Cost Selling Price $40.00

$5.95

$2.50

$2.00

$44.50

1.25

.79

Food Cost % Total Sales 34% $119.00

40% 25% $6.25

$7.90

$113.15

$44.50

÷ $113.15

= 39% FC

OH 4-23

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 4-24

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 4-25

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 4-26

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 4-27

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 100 Total portion sales of all menu items

OH 4-28

Menu Item Popularity Index Menu Item

Strip Steak Ginger Shrimp Duck Breast Lamb Chops Pork Loin Vegetarian Burrito Veal Steak Steak Diane

Total Covers Number Sold

145 116 21 11 45 50 120 111 619

Popularity Index %

23.4

18.7

3.3

1.8

7.3

8.2

19.4

17.9

100%

OH 4-29

Menu Engineering

 Method of menu evaluation  Considers contribution margin (selling price minus menu item food cost)  Considers popularity (number of items sold)

Menu Item

Strip Steak Ginger Shrimp Duck Breast Lamb Chops Pork Loin Vegetarian Burrito Veal Steak Steak Diane

Menu Engineering Number Sold

145 116

Pop Index %

23.4

18.7

Food Cost

$7.50

$5.20

Sales

$23.65

$18.00

21 11 45 50 120 111 3.3

1.8

7.3

8.2

19.4

17.9

$7.30

$6.90

$6.30

$3.80

$6.35

$7.75

$21.50

$21.50

$20.50

$16.50

$20.85

$24.75

619 100%

Item CM

$16.15

$12.80

$14.20

$14.60

$14.20

$12.70

$14.50

$17.00

Total Cost

$1087.50

$603.20

Total Sales

$3429.25

$2088.00

Menu CM

$2341.75

$1484.80

$153.30

$75.90

$451.50

$236.50

$298.20

$160.60

$283.50

$190.00

$922.50

$825.00

$639.00

$635.00

$762.00

$860.25

$2502.00

$2747.25

$1740.00

$1887.00

$4015.65

$13202 $9186.00

$14.84

OH 4-30

Menu Analysis

OH 4-31

Popularity

OH 4-32

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 4-33

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 = Standard food cost percent

OH 4-34

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 4-35

Monitoring Menu-Related Concerns continued

 Actual food cost percentage  Reported on the restaurant’s income statement

OH 4-36

Monitoring Menu Related Concerns continued

Summary  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 4-37

How Would You Answer the Following Questions?

1.

2.

3.

4.

A composite food cost percentage is a (weighted/unweighted) average. A menu product mix spreadsheet is designed to identify a restaurant’s composite food cost percentage. (True/False) The menu pricing method that considers target profit in its computation is the A.

B.

C.

D.

Factor method Markup on cost method Texas Restaurant Association (TRA) method Yield percent method Product mix has very little impact on the ability of a restaurant to achieve its standard food cost percentage. (True/False)

OH 4-38

Key Term Review

 Composite food cost percentage  Factor method  Markup  Markup differentiation  Markup on cost method

OH 4-39

Key Term Review continued

 Menu engineering  Menu product mix  Price-value relationship  Pro forma income statement  Texas Restaurant Association (TRA) markup method

OH 4-40

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.