1. Cost Control and the Menu—Determining Selling Prices and Product Mix4
Controlling Foodservice Costs
OH 4-1

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.
Instructor’s Notes
Indicate that these objectives (competencies) drive the information in the chapter and in this session.
Ask the following question, “How do restaurant managers decide the prices they charge for their menu items?”

3. Menu Prices If they are too high; Sales suffer If they are too low;
Profits suffer
Instructor’s Notes
Explain that a properly priced menu will help maximize sales because guests will feel they are getting true value for their money, and it will maximize the restaurant’s profits as well.

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 item’s cost and selling price)
Instructor’s Notes
Explain that managers can predict profitability if they create a pro forma income statement.
Tell how experienced managers develop sales predictions.

5. Pro Forma Income Statement as Budget Standard
Instructor’s Notes
Explain that cost of food sales is a very large and important restaurant expense.
Ask if the students think managers want to know the specific performance targets that will be used to evaluate their work.
Provide examples of food cost percentages that are common in different industry segments.

6. Menu Pricing Methods
The Texas Restaurant Association (TRA) markup method
The factor method
The markup on cost method
Instructor’s Notes
Explain that there are several approaches to address menu pricing.
Indicate that the best method to solve a management problem varies, based on the specific characteristics of the restaurant.

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
Instructor’s Notes
Explain that the TRA method uses a formula that considers sales, costs, and profit.

8. The Texas Restaurant Association (TRA) Markup Method continued
Step 2 – Subtract the total in Step 1 from 1.00.
Example
1.00
Total from Step 1 –
0.65
Divisor
0.35
Instructor’s Notes
Explain that the “1.00” in this formula can also be seen as “one dollar,” and that the .35 in this case can be seen as “35 cents per dollar” of sales.
Explain that the “.35” in this example is named the “divisor.”

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
$ ÷
$11.71
Instructor’s Notes
Explain that this formula allows for easy changes to profit targets (increases or decreases in desired profit levels).
Explain that this formula allows operators to vary the labor percentage assigned to a menu item.

10. The Texas Restaurant Association (TRA) Markup Method continued
The Texas Restaurant Association’s menu pricing formula considers labor costs when determining selling prices.
Instructor’s Notes
Ask students to identify menu items with very high labor costs. Examples—entrees with complex sauces, some soups and salads, and labor-intensive specialty desserts.
Explain that most restaurants round their menu prices because they do not like odd-cent prices.

11. The Factor Method
Determines menu prices based upon the standard (target) food cost percentage
Involves a two-step process
Instructor’s Notes
Remind students that the standard or target food cost is established by management.
Ask the following question, “If the target food cost for a restaurant rarely changes, why must managers continually recompute menu selling prices?” Answer: Because menu item food costs change frequently.

12. The Factor Method continued
Step 1 – Calculate the appropriate factor using the following formula.
1.00 ÷
Standard food cost percentage =
Factor ÷
2.86
Instructor’s Notes
Point out that this example assumes a 35 percent target food cost percentage.
Ask students to mentally compute the factors for the following target cost percentages:
50% = 2
33.3% = 3
25% = 4
Make the statement, “If you know the factor and the menu item’s cost, you are ready for Step 2”.

13. The Factor Method continued
Step 2 – Calculate the menu price using the following formula.
Factor x
Menu item cost =
Selling price
x $4.10
$11.73
Instructor’s Notes
Point out that this example uses the factor calculated in Step 1 and assumes a menu item food cost of $4.10.
Explain that a shortcoming of this method is that it does not directly take into account the labor cost required to make the menu items.

14. The Markup on Cost Method
Is popular
Is easy to use
To calculate menu prices, use the following formula.
Instructor’s Notes
Point out that this example assumes a menu item cost of $4.10 and a target food cost percentage of 35 percent.
Explain that each of the three methods are mathematically the same, so any variation in results is from rounding error.
Menu item cost ÷
Standard food cost percentage =
Selling price
$ ÷
$11.71

15. Market Forces Affect Selling Prices
Menu prices can be affected by a variety of external forces, including
Competition
Price-value relationship
Instructor’s Notes
Explain that competition affects pricing, especially in the quick-service restaurant (QSR) market. Example—the competition for $0.99 or $1.00 value-meal offerings popular with QSR restaurants.
Explain that price-value perception is driven by service levels as well as food cost and quality.

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).
Instructor’s Notes
Indicate that a cup of tea can be made for pennies, but is sold at a multiple of its cost that is very high (five to twenty times).
Explain that, in some restaurants, steaks may not even be marked up two times their original cost.

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.
Instructor’s Notes
Explain that it is the guest choosing from alternative menu items, who significantly determines a restaurant’s weighted food cost percentage.

18. 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.
Instructor’s Notes
Point out that it is the average food cost percentage that must meet the restaurant’s food cost percentage target.
Ask students, “In what ways does the menu mix determine a restaurant’s food cost percentage target?”

19. Weighted Food Cost Percent
Right way to determine weighted average unit cost
Menu Item
# Sold
Unit Cost
Total Cost
Hamburger 20
$2.00
$40.00
Fries 5
$0.50
$2.50
Soda 10
$0.20
Total 35
$44.50
Instructor’s Notes
Explain that, in this example, the weighted average cost of one menu item is $1.27.
$44.50 ÷ 35 =
$1.27

20. Weighted Food Cost Percent continued
Wrong way to determine average unit cost
Menu Item
Unit Cost
Hamburger
$2.00
Fries
$0.50
Soda
$0.20
Total
$2.75
Instructor’s Notes
Explain that in this example the “unweighted” average cost of one menu item is $ 0.91.
Make the following statement, “Weighted averages take into account how many of each item is sold, and unweighted averages do not consider the number of each item sold.”
$2.75 ÷ 3 =
$0.91

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.
Instructor’s Notes
1. Define “weighted” and “composite” food cost percentage.

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
Instructor’s Notes
Explain that even those menu items that sell infrequently should be included on the spreadsheet.

23. 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)
Instructor’s Notes
Ask students to review Exhibits 4f and 4g on page 51 of the chapter.
Explain that a spreadsheet program could be used to complete these computations. Tell students what they can do, or where they can go, to learn this important skill.

24. Menu Product Mix continued
The items that guests select have a significant impact on a restaurant’s weighted food cost percentage.
Instructor’s Notes
Ask the following question, “Assume that a restaurant offered five items for sale, and each had a different food cost percentage. Assume also that 95% of the restaurant’s sales consisted of the sale of only one item. What impact would that have on the restaurant’s weighted food cost percentage?”

25. Menu Engineering Method of menu evaluation
Considers contribution margin (selling price minus menu item food cost)
Considers popularity (number of items sold)
Instructor’s Notes
Explain that menu engineering software exists to help with the calculations, but an understanding of the process is needed to analyze its results.

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
Instructor’s Notes
Make the following statement, “Understanding food cost really means understanding three distinct types of food costs. We will review them now.”

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
Instructor’s Notes
Explain that this is the food cost percentage identified earlier in the chapter for use in determining menu prices. It is the target food cost that the manager wishes to achieve.

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
Instructor’s Notes
Explain that this is the food cost percentage computed by using the menu product mix spreadsheet. It is heavily influenced by guests’ food choice selections.

29. Monitoring Menu-Related Concerns continued
Actual food cost percentage
Reported on the restaurant’s income statement
Instructor’s Notes
Remind students that a restaurant’s standard, weighted, and actual food cost percentages can be in-line and similar. However, differences in sales mixes between historic and actual guest choices along with product loss, waste, and theft typically result in some differences between these three food cost calculations.

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.
Instructor’s Notes
Ask for examples of specific reasons why the actual food cost percentage might exceed that computed on a restaurant’s menu product mix spreadsheet. Answers—theft, inaccurate sales data, waste and loss, and nonreporting of sales.

31. How Would You Answer the Following Questions?
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
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)
Instructor’s Notes
Answers
Weighted
True C
False
Note: indicate that the last part of this discussion will provide a review of definitions for the key terms used in the chapter.

32. Key Term Review Composite food cost percentage Factor method Markup
Markup differentiation
Markup on cost method
Instructor’s Notes
Composite food cost percentage—weighted average food cost percentage for all items sold; also called weighted food cost percentage
Factor method—used to determine a menu item’s sales prices based simply on the basis of the standard food cost percentage
Markup—the difference between the actual (food) cost of producing an item and its selling price listed on the menu
Markup differentiation—relationship between cost of an item and its price after markup
Markup on cost method—another method used to determine a menu item’s selling price based on the standard food cost percentage
Note that there are additional key terms for this chapter.

33. Key Term Review continued
Menu engineering
Menu product mix
Price-value relationship
Pro forma income statement
Texas Restaurant Association (TRA) markup method
Instructor’s Notes
Menu engineering—menu evaluation process that considers the contribution margin and popularity of each menu item
Menu product mix—a detailed analysis that shows the quantities sold of each item, along with their selling prices and standard portion costs
Price-value relationship—connection between the selling price of an item and its worth to the customer
Pro forma income statement—income statement that is prepared before the fact
Texas Restaurant Association (TRA) markup method—menu price calculation method that reflects the direct relationship between profit and selling price.

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.
Instructor’s Notes
Ask students to do a personal assessment of the extent to which they know the information or can perform the activity noted in each objective.