COST-VOLUME-PROFIT RELATIONSHIPS

1. COST-VOLUME-PROFITRELATIONSHIPS Variable Costs, Variable Rates Fixed Costs, Profit Contribution Margin/Rate Break Even Point Determining Selling Price & Product Mix Applying Formulas

2. COST-VOLUME-PROFITRELATIONSHIPS Variable Costs—Costs that vary with Volume COG Labor—Hourly Wages and Benefits Supplies—Cleaning, Napkins, etc. Contribution Margin—Fixed costs and Profit generated by sales Sales=S Fixed Costs=FC Variable Costs=VC Profit=P

3. FORMULAS: S=VC+(FC+P) S=VC+CM VC=S-CM VC=S-(FC+P) CM=S-VC FC+P=S-VC

4. Using the Formulas -To create the Operating Budget or to Forecast -Profitability Analysis -Calculate Breakeven (0 profit position) -Determine how much can be spend on variables if management has predetermined the fixed costs and desired profit.

5. Variable Rate (VR)=VC/Total Sales -The % of sales used to pay for variable costs (i.e. food and beverage costs and variable labor) Contribution Rate (CR)=CM/Total Sales -The % of sales available to pay for fixed costs and profit

6. Break Even Point The point at which you will pay all expenses, but generate no profit BE=$FC/%CR Break Even=Fixed Costs/Contribution Rate

7. FORMULAS $VC / S = VR(%) $CM/ S = CR(%) VR + CR = 1 S = FC + P / CR

8. SALES FORECASTINGSALES = FIXED COST + PROFIT / CONTRIBUTION MARGINUNIT SALES = FC + PROFIT/AVG. CHECK – AVERAGE VC .

9. CONTRIBUTION MARGIN & RATE .

10. SALES FORECASTING .

11. PURCHASING, RECEIVING, STORAGE & ISSUING • PURCHASING • TERMINOLOGY • STANDARDS • FORMS • METHODS • FORMULAS • RECEIVING -TERMINOLOGY -STANDARDS & TECHNIQUES • STORAGE PRINCIPLES • DIRECTS vs. STORES • ISSUING PRACTICES • INVENTORY VALUATION • AVG. INVENTORY & INVENTORY TURNOVER

12. PURCHASING Purchasing Standards are dictated by the Target Audience -Who is the clientele? -What concept have you developed to appeal to this audience? -What will their expectations be? Three areas of standards development: Quality Quantity Cost

13. QUALITY Product specifications: Intended Use Product Name Brand Name Grade Color Size of Product Size of Package Minimum Weight Required Yield Place of Origin Ripeness

14. Purchase Specification—All specs relating to the purchase and receiving of the product Credit Terms Delivery Schedule Supplier Availability Intended Use Product Name Brand Name Grade Color Size of Product Size of Package Minimum Weight Required Yield Place of Origin Ripeness

15. ORDERING Par Stock (Par Level)—the point at which an item should be ordered Periodic Ordering—when routes are set and merchandise is only delivered on that schedule Amount Required for the Period +Safety stock -Amount on Hand Amount to be Ordered (adjusted to case size This is standard in most small restaurants where minimum orders are a consideration, and with larger organizations what use One-Stop-Shopping and keep ordering to a minimum to reduce costs.

16. PERPETUAL ORDERING -Fluctuating order dates -Product ordered whenever the level falls below par -Orders cover what will be used until delivery and another order can be placed Maximum Storage Amt. -Ordering Point +Amount needed before delivery received Amount Needed +Safety Stock (% of Order or Specific Count Amount to Order

17. PERIODIC ORDERING • .

18. Inventory Bin Cards are used to record inventory levels as merchandise is received and issued. Physical Inventory serves as a check of the perpetual inventory system. Physical inventory should be done AT LEAST once a month.

19. BUYING METHODS Open bid—Stewards Market Quotation Sheet Call for bids Can be shown to other vendors and used as leverage Sealed bids—bids are submitted sealed and cannot be used against each other. Can be re-bid after the first round Used more for equipment and furniture than for food Cost Plus—the vendor guarantees to deliver the product at their cost plus a certain percentage profit—used frequently for produce Ties you into one vendor Who determines the price?   Generally used in high volume situations as a negotiating tool to get lower prices Co-op Buying—small operations join together--volume discounts--buy in bulk and redistribute

20. Purchasing One-Stop-Shopping—single vendors handle a large volume of the product needed. Meat and product may fall outside the contract U.S. Foodservice and Sysco are the major One-Stop vendors Contracts—are frequently written for perishables and are guaranteed for a certain period of time Ties in prices, which may then rise or drop on the active market Warehouse Buying—large warehouses; a full line of product: buyers shop supermarket style Jetro, Restaurant Depot Standing Orders—vendors maintain stock and take returns on unused/old product Bread, dairy Centralized Purchasing--main office sets standards; local branches purchase No local customization for regional preferences On-Line Purchasing—specifications are sent out via web site and anyone can submit bid Purchase Pro

21. HOW MUCH PRODUCT IS NEEDED? EP = Edible Portion AP = As Purchased %Yield = ED/AP $EP = $AP x %Yield AP = EP/%Yield %Yield are available from several sources -on-line product identification web sites -vendors -purchasing manuals -hands on analysis

22. EP / AP = YIELDAP x YIELD = EPEP / YIELD = AP • .

23. RECEIVING, STORAGE AND ISSUING The Receiving Department is responsible for maintaining the standards set by management. They must have copies of all standards set Quality—Product Specifications Quantity—Purchase Orders Cost—Purchase Orders

24. RECEIVING, STORAGE AND ISSUING Must Haves: Scales—weight all meats and product Thermometer—make sure food is delivered at appropriate temperatures Calculator—make sure to delete anything that is missing and subtract from total Knife—if ripeness standards are set, cut fruit to verify Receiving Sheet—sent to Accounts Payable with all Invoices received for the day

25. RECEIVING,STORAGEAND ISSUING FIFO—First In First Out Date all incoming inventory Rotate stock Maintain product quality through appropriate storage; temperature, humidity Product Temperature %Humidity Beef 34-38 Poultry 28-32 Fish 32-36 Live Shellfish 30-40 Eggs 40-45 Dairy 35-41 Fruit and Vegetables 34-50 85-95 Freezer 0 Dry Storage 70 70

26. RECEIVING, STORAGE AND ISSUING Protect inventory from theft and pilferage--System of checks and balances Requisition Forms Limit access to storage areas Hire people with history of integrity Locate storage areas in easy to secure locations Directs—products delivered straight to their place of use; immediately charged to the department ordering them Stores—products delivered to a warehouse area until needed; charged to the appropriate department when requisitioned

27. INVENTORY VALUATION Physical Inventory should be done AT LEAST once a month. Inventory high volume items more frequently High cost items may be inventoried every day Five common types of inventory valuation: FIFO, LIFO, Weighted Avg., Actual, Last Price

28. 1. FIFO—Closing inventory is calculated using the most recent prices Orders: 1/1 5 cases at $4 each 1/15 4 cases at $5 each 1/20 4 cases at $3 each 1/29 5 cases at $4 each Closing Inventory: 8 cases Inventory: 5 cases at $4=$20 3 cases at $3=$9 Total Value: $29.00

29. 2. LIFO—Closing inventory is priced using the earliest prices Closing Inventory: 8 cases Inventory: 5 cases at $4=$20 3 cases at $5=$15 Total Value: $35.00 Orders: 1/1 5 cases at $4 each 1/15 4 cases at $5 each 1/20 4 cases at $3 each 1/29 5 cases at $4 each

30. Inventory Valuation 3. Weighted Average Weighted Average=Total Costs/Total Units Orders: 1/1 5 cases at $4 each $20 1/15 4 cases at $5 each $20 1/20 4 cases at $3 each $12 1/29 5 cases at $4 each $20 Cases 18 $Total $72 Weighted Avg. $4 Closing Inventory= 8 cases $32 4. Actual Price Method--Each item is marked as it is stored; rarely used 5. Last Price Method--inventory is priced using the last recorded price   Most accurate because it reflects “replacement cost” 8 cases @ $4 = $32

31. INVENTORY TURNOVER Inventory turnover varies by style of restaurant: Full service 20-25/yr. Fast Food 150+/yr. Liquor 7-12/yr. Excessively high turnover—Shortages Customer dissatisfaction Extremely low turnover—Spoilage Pilferage Costs--estimated @ 15% of inventory. Opportunity Costs

32. Inventory Turnover = COGS/Average Inventory COGS=O I + P – CI Average Inventory=OI +C I 2

33. AVERAGE INVENTORY & TURNOVER • .