Transcript Title of Chapter
Cost Control and the Menu—Determining Selling Prices and Product Mix
Chapter 4 – NRAEF Chapter 8 - NRAEF Chapters 13-15 Asch
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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.
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Chapter 13 - Chapter Learning Objectives
Evaluate a menu as a marketing tool. Evaluate menu design techniques and principles, including: Physical menu characteristics Focal point Methods of emphasis Menu diversity Signature dish Menu layout Menu descriptions Perform a menu analysis. Analyze data from a menu analysis.
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Chapter 14 - Chapter Learning Objectives
Understand the steps to forecasting. Differentiate among qualitative and quantitative data. Examine POS data Calculate a menu analysis. Explore various sales control techniques. Explore methods of theft protection.
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Chapter 15 - Chapter Learning Objectives
Differentiate among menu designs. Calculate menu prices using a variety of methods. Evaluate the importance of a signature dish. Evaluate techniques to improve sales. Implement different suggestive selling techniques and correlate the value of effective suggestive selling. Distinguish the components of a pre-shift meeting. Investigate employee empowerment.
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Menu Prices
If they are too high; If they are too low; Sales suffer Profits suffer
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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)
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Pro Forma Income Statement as Budget Standard
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Menu Pricing Methods
The Texas Restaurant Association (TRA) markup method The factor method The markup on cost method
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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
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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
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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 4-13 The Texas Restaurant Association’s menu pricing formula considers labor costs when determining selling prices.
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The Factor Method
Determines menu prices based upon the standard (target) food cost percentage Involves a two-step process
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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
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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
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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
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Market Forces Affect Selling Prices
Menu prices can be affected by a variety of external forces, including Competition Price-value relationship
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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).
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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.
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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.
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Weighted Food Cost Percent
Right way to determine weighted average unit cost Menu Item Hamburger Fries Soda Total # Sold 20 5 10 35 Unit Cost $2.00
$0.50
$0.20
Total Cost $40.00
$2.50
$2.00
$44.50
$44.50
÷ 35 = $1.27
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Weighted Food Cost Percent continued
Wrong way to determine average unit cost Menu Item Hamburger Fries Soda Total Unit Cost $2.00
$0.50
$0.20
$2.75
$2.75
÷ 3 = $0.91
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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.
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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
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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)
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Menu Product Mix continued
The items that guests select have a significant impact on a restaurant’s weighted food cost percentage.
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Menu Engineering
Method of menu evaluation Considers contribution margin (selling price minus menu item food cost) Considers popularity (number of items sold)
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Monitoring Menu-Related Concerns
Three factors must be considered and compared when analyzing food cost efficiency.
Standard food cost percentage Weighted food cost percentage Actual food cost percentage
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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
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Monitoring Menu-Related Concerns continued
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 = Weighted food cost percent
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Monitoring Menu-Related Concerns continued
Actual food cost percentage Reported on the restaurant’s income statement
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Monitoring Menu Related Concerns continued
Summary If the weighted percentage exceeds the standard percentage, take steps to manage sales activity.
If the actual food cost percentage exceeds the weighted percentage, take steps to improve food controls.
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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)
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Key Term Review
Composite food cost percentage Factor method Markup Markup differentiation Markup on cost method
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Key Term Review continued
Menu engineering Menu product mix Price-value relationship Pro forma income statement Texas Restaurant Association (TRA) markup method