Presentation on theme: "OH 4-1 Cost Control and the MenuDetermining Selling Prices and Product Mix Controlling Foodservice Costs 4 OH 4-1."— Presentation transcript:
OH 4-1 Cost Control and the MenuDetermining Selling Prices and Product Mix Controlling Foodservice Costs 4 OH 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 items cost and selling price)
OH 4-5 Pro Forma Income Statement as Budget Standard
OH 4-6 Menu Pricing Methods The Texas Restaurant Association (TRA) markup method The factor method The markup on cost method
OH 4-7 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 4-8 The Texas Restaurant Association (TRA) Markup Method continued Step 2 – Subtract the total in Step 1 from Example 1.00 Total from Step 1–0.65 Divisor0.35
OH 4-9 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 4-10 The Texas Restaurant Association (TRA) Markup Method continued The Texas Restaurant Associations menu pricing formula considers labor costs when determining selling prices.
OH 4-11 The Factor Method Determines menu prices based upon the standard (target) food cost percentage Involves a two-step process
OH 4-12 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 4-13 The Factor Method continued Step 2 – Calculate the menu price using the following formula. FactorxMenu item cost=Selling price 2.86 x $4.10= $11.73
OH 4-14 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 4-15 Market Forces Affect Selling Prices Menu prices can be affected by a variety of external forces, including Competition Price-value relationship
OH 4-16 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 4-17 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 4-18 Menu Product Mix Is Important continued The average food cost percentage is determined by menu mix. Menu mix significantly determines a restaurants food cost percentage target.
OH 4-19 Weighted Food Cost Percent Right way to determine weighted average unit cost Menu Item# SoldUnit CostTotal Cost Hamburger20$2.00$40.00 Fries5$0.50$2.50 Soda10$0.20$2.00 Total35$44.50 ÷35=$1.27
OH 4-20 Weighted Food Cost Percent continued Wrong way to determine average unit cost Menu ItemUnit Cost Hamburger$2.00 Fries$0.50 Soda$0.20 Total$2.75 ÷3=$0.91
OH 4-21 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 4-22 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 4-23 Menu Product Mix Spreadsheet continued Lists each menu items 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 4-24 Menu Product Mix continued The items that guests select have a significant impact on a restaurants weighted food cost percentage.
OH 4-25 Menu Engineering Method of menu evaluation Considers contribution margin (selling price minus menu item food cost) Considers popularity (number of items sold)
OH 4-26 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
OH 4-27 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 4-28 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
OH 4-29 Monitoring Menu-Related Concerns continued Actual food cost percentage Reported on the restaurants income statement
OH 4-30 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.
OH 4-31 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 restaurants composite food cost percentage. ( True/False ) 3. The menu pricing method that considers target profit in its computation is the A. Factor method B. Markup on cost method C. Texas Restaurant Association (TRA) method D. 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 4-32 Key Term Review Composite food cost percentage Factor method Markup Markup differentiation Markup on cost method
OH 4-33 Key Term Review continued Menu engineering Menu product mix Price-value relationship Pro forma income statement Texas Restaurant Association (TRA) markup method
OH 4-34 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.