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

1. Cost Control and the Menu—Determining Selling Prices and Product Mix • Controlling Foodservice Costs 4 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.

3. Menu Prices • If they are too high; Sales suffer • If they are too low; Profits suffer

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)

5. Pro Forma Income Statement as Budget Standard

6. Menu Pricing Methods • The Texas Restaurant Association (TRA) markup method • The factor method • The markup on cost method

7. The Texas Restaurant Association (TRA) Markup Method Step 1 – Add target percentage values for labor, all other expenses (except food), and profit. Example

8. The Texas Restaurant Association (TRA) Markup Method continued Step 2 – Subtract the total in Step 1 from 1.00. Example

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.

10. The Texas Restaurant Association (TRA) Markup Method continued The Texas Restaurant Association’s menu pricing formula considers labor costs when determining selling prices.

11. The Factor Method • Determines menu prices based upon the standard (target) food cost percentage • Involves a two-step process

12. The Factor Method continued Step 1 – Calculate the appropriate factor using the following formula.

13. The Factor Method continued Step 2 – Calculate the menu price using the following formula.

14. The Markup on Cost Method • Is popular • Is easy to use To calculate menu prices, use the following formula.

15. Market Forces Affect Selling Prices Menu prices can be affected by a variety of external forces, including • Competition • Price-value relationship

16. 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). Markups Affect Selling Prices

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.

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.

19. Weighted Food Cost Percent • Right way to determine weighted average unit cost

20. Weighted Food Cost Percent continued • Wrong way to determine average unit cost

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.

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

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)

24. Menu Product Mix continued • The items that guests select have a significant impact on a 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)

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

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

28. Monitoring Menu-Related Concerns continued • Weighted food cost percentage • The percentage that results from the actual food sales • Calculation

29. Monitoring Menu-Related Concerns continued • Actual food cost percentage • Reported on the restaurant’s income statement

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.

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)

32. Key Term Review • Composite food cost percentage • Factor method • Markup • Markup differentiation • Markup on cost method

33. Key Term Review continued • Menu engineering • Menu product mix • Price-value relationship • Pro forma income statement • Texas Restaurant Association (TRA) markup method

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.