Calculating Sales Price and Food Cost chapter 6 Calculating Sales Price and Food Cost

Menu Pricing Methods Multiple approaches, all valid. Sales prices for a dish must cover the item’s food cost plus extra to help cover all other non-food costs. Contribution Margin = the portion of a dish’s sales price that is left after the item’s cost per portion is covered.

Calculating Menu Price Using Food Cost Percent FC SP = FC ÷ FC% SP x FC%

Food Cost Percent Method Food Cost = Cost per portion from recipe spreadsheet Industry FC% often ranges 20-40%, but most operate in the low to mid 30’s. Selecting the right FC% is the biggest challenge

Example 6a What is the sales price for a veal entrée with a cost per portion of $5.71, if the restaurant targets a food cost percent of 30.2%? SP = FC ÷ FC% = $5.71 ÷ 0.302 = $18.91

Overhead-Contribution Method The overhead-contribution method uses budgets and historical data to determine overhead and profit costs and then FC%. CM% = Contribution Margin % CM% = (overhead + profit) ÷ sales FC% = 100% - CM% (here, CM% is in % form) SP = FC ÷ FC% (in decimal form)

Example 6b A restaurant has overhead of $710,000 and wants profit of $47,000 from forecast sales of $1,000,000. Using overhead-contribution method, determine FC% and sales price for grouper with a cost per portion of $5.28. CM% = ($710,000 + $47,000) ÷ $1,000,000 = 75.7% FC% = 100% - 75.7% = 24.3% SP = $5.28 ÷ 0.243 = $21.79

Texas Restaurant Association (TRA) Method The TRA method is similar to the overhead-contribution, but profit percent (and thus FC%) can vary by menu category or even by menu item. FC% = 100% - overhead % - profit % Low-profit entrées and high-profit other categories Higher profit on slow-moving items SP = FC ÷ FC%

Calculating Menu Prices Using Prime Costs Prime cost definitions: Combined total cost of food, beverage, and labor cost (bird’s eye perspective) Combined total cost per portion and direct labor cost needed to prepare a dish (single portion perspective) Direct Labor Cost is determined by observing staff productivity and factoring employee hourly wage rates

Prime Cost Method Prime Cost = Food Cost + Direct Labor Cost Sales Price = Prime Cost X Price Factor Price factor may start off randomly, but it gets refined with historical data

Prime Cost = $1.92 + $1.65 = $3.57 Sales Price = $3.57 X 3.1 = $11.07 Example 6c A restaurant uses a price factor of 3.1. Chicken roulade costs $1.92 per portion with a direct labor cost of $1.65. Determine sales price using the prime cost method. Prime Cost = $1.92 + $1.65 = $3.57 Sales Price = $3.57 X 3.1 = $11.07

Actual Pricing Method Uses budget percents to determine price divisor to apply to dish’s prime cost. Price Divisor = 100% - (Variable Cost % + Fixed Cost % + Profit %) Sales Price = Prime Cost ÷ Price Divisor

Example 6d In a given restaurant, variable cost is 29%, fixed cost is 12%, profit is 6%. Using Actual Price Method, calculate sales price for a dish costing $3.09 per portion with a direct labor cost of $0.88 Price Divisor = 100% - (29% + 12% +6%) = 53% Prime Cost = $3.09 + $0.88 = $3.97 SP = $3.97 ÷ 0.53 = $7.49

Gross Profit Pricing Method Gross profit is money made from sales after food and beverage are deducted (like contribution margin, but it refers to total sales over a period of time). Gross profit per customer = gross profit over a period ÷ customers over that period Sales Price = Cost per portion + Gross profit per customer

Example 6e Each month a restaurant has gross profit of $2,890 and serves 1,000 customers. A sandwich costs $1.47 per portion. Using the gross profit method, determine a sales price for the sandwich. Gross profit per customer = $2,890 ÷ 1,000 = $2.89 Sales Price = $1.47 + $2.89 = $4.36

Why Use Gross Profit Method Appropriate with low-cost items that are similar in costs to each other – like a coffee shop Because gross profit per customer is added (not multiplied), sales prices remain in a narrow range for items that only vary in cost by a few pennies but may be quite different percentage-wise. ($0.20 vs. $0.40)

Base-Price Method Base-price method starts with sales price and works backward to create target food cost per portion. It is often used in corporate cafeterias and fast food (think: $0.99 menu). Determine desired sales price FC = SP X FC% Modify recipe to hit FC target

Matching Competitors’ Prices Keeps sales prices competitive, but… Risky because you don’t know the competitors’ costs and special arrangements. Family businesses may use free labor from family members. Large operations may get cheap purveyor prices for buying in bulk You may not be able to afford to sell at their prices.

Choosing the Best Pricing Method Prime cost methods work well when preparation time for dishes varies greatly. Base price approach is best when a price point is required to remain competitive. Food cost percent methods are easy to use and work well when all dishes have similar direct labor costs and food costs are not below 20%. There is no best method for everyone!

Factors that Impact Final Menu Pricing Competition (studied through a competitive analysis) Price Sensitivity of a product Perceived Value Product Differentiation – how greatly a product differs from similar competitor products

Psychological Pricing Guests are most comfortable with prices ending in: $0.00, $0.25, $0.45, $0.49, $0.50, $0.75, $0.95, or $0.99. Whole dollars suggest luxury. Prices ending in “9” suggest a deal. Prices ending in “5” or “0” suggest good value but not “cheap.” In most cases, calculated prices are rounded up to the nearest “comfortable” price.

Controlling Total Food Cost and Sales Tracking actual food cost as a percent of sales helps a manager spot unexpected loss. Food cost for a month must account for more than just food purchases: Food and beverage purchases are tracked separately Inventory in storage is valued by physical count at the start and end of each period

Controlling Total Food Cost (cont.) Employee meals are valued and shifted to labor cost as they are employee perks. Promotions (giving away food for marketing purposes) is assigned to marketing, not food cost. Transfers move ingredients from one department to another. “Transfer in” adds to the food cost; “transfer out” deducts the value from the food cost. Transfers can occur between restaurants in a larger hotel or campus or between a kitchen and bar

Controlling Total Food Cost (cont.) Steward Sales are sales of ingredients from a purveyor to an employee using the restaurant as a middleman . Grease Sales are monies raised by selling grease or animal fat to another company.

Cost of Food Sold Formula Preliminary Cost of Food Sold = Opening Inventory + Purchases – Closing Inventory Cost of Food Sold = Preliminary Cost of Food + Transfers In And/or - Transfers Out - Employee Meals - Promotions and Write-Offs - Steward Sales - Grease Sales

Example 6f A hotel restaurant has the following data. What is the cost of food sold for this restaurant? food purchases = $73,000 opening inventory = $41,000 closing inventory = $44,000 transfers in = $1,200 transfers out = $250 employee meals = $2,850 promotions and write-offs = $460 steward sales = $180 grease sales = $30

Example 6f (cont.) Preliminary Cost of Food =$41,000 + $73,000 - $44,000 = $70,000 Cost of Food Sold = $70,000 + $1,200 - $250 - $2,850 - $460 - $180 - $30 = $67,430

Total Sales and Food Cost Percent Total Sales (food sales) = total money charged to customers for the food they purchase. Beverages tracked separately Standard Food Cost Percent = budgeted FC% used to determine menu prices Actual Food Cost Percent = actual FC% calculated from cost of food sold and sales Often a variance between actual and stand FC% because of menu price rounding, theft, waste, spoilage, fluctuation in purveyor pricing, or guests who leave without paying

FC-FC%-Sales Graphic Formula FC% x Sales

FC% Variance Managers should try to keep actual and standard FC% as close as possible High FC% translates to lower profit

Reasons and Solutions for FC% Variance Theft requires greater security Waste requires closer production oversight or additional employee training Spoilage requires purchasing adjustments Purveyor price increase requires new purveyor, portion size change, or menu price increase Gov’t regulations can have an impact, too

Below Budget FC% Below budget FC% is only good if it comes from better pricing and efficiency. May signal reduction of quality or quantity standards. Reduced standards = fewer customers and less revenue. Variances are red flags that require investigation to see if standards are being met, where the problem lies, or if the variance is good news.

Controlling Revenue Point of Sales (POS) Systems control revenue by assigning all food ordered from the kitchen to a guest and server. POS tracks which server is responsible for uncollected monies. Only managers should be able to remove an item from a guest check. Managers can require all cash to go through a single cashier.

Controlling Revenue with a POS Computer-less businesses should use duplicate check pads with one check going to the table and the duplicate copy going to the kitchen. Managers can reconcile kitchen and cashier checks to confirm they match and none are missing. Checks can be reviewed for addition errors too.