OH 4-1 Agenda Review quiz from Chapter 2 Chapter 4 – Cost Control and the Menu Quiz Chapter 4

OH 4-2 Cost Control and the Menu—Determining Selling Prices and Product Mix Controlling Foodservice Costs 4 OH 4-2

OH 4-3 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 4-4 Menu Prices If they are too high; Sales suffer If they are too low; Profits suffer

OH 4-5 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)

OH 4-6 Pro Forma Income Statement as Budget Standard

OH 4-7 Industry Standards Restaurants typically run in the low to mid 30% Italian - ~ 28% Multi Unit - ~ 32% American/Regional - ~35% Steak - ~ 40% Prime Cost = 65% (some industry professionals like to see this nearer to 55%)

OH 4-8 Menu Pricing Methods The Texas Restaurant Association (TRA) Markup Method The Factor Method The Markup on Cost Method

OH 4-9 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 4-10 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 4-11 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 4-12 The Texas Restaurant Association (TRA) Markup Method continued The Texas Restaurant Association’s menu pricing formula considers labor costs when determining selling prices.

OH 4-13 The Factor Method Determines menu prices based upon the standard (target) food cost percentage Involves a two-step process

OH 4-14 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 4-15 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 4-16 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 4-17 Market Forces Affect Selling Prices Menu prices can be affected by a variety of external forces, including Competition Price-value relationship Mark-Up Differentiation

OH 4-18 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 4-19 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 4-20 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.

OH 4-21 Composite Food Cost Percent Wrong way to determine average food cost percent Menu Item# SoldUnit Cost Total CostSelling Price Food Cost % Total Sales Hamburger20$2.00$40.00$5.9534%$ Fries5$0.50$ %$6.25 Soda10$0.20$ %$7.90 Total35$44.50$ = 99 ÷3=33% FC

OH 4-22 Composite Food Cost Percent continued Menu Item# SoldUnit Cost Total CostSelling Price Food Cost % Total Sales Hamburger20$2.00$40.00$5.9534%$ Fries5$0.50$ %$6.25 Soda10$0.20$ %$7.90 Total35$44.50$ $44.50 ÷$113.15=39% FC Right way to determine is by weighted average food cost

OH 4-23 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 4-24 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 4-25 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)

OH 4-26 Menu Product Mix continued The items that guests select have a significant impact on a restaurant’s weighted food cost percentage. Menu Item Popularity Index is critical information

OH 4-27 Menu Item Popularity Index Ratio of portions sold for a given menu item to total portion sales for all menu items Key element in forecasting sales Critical in menu evaluation Popularity Index = Portion sales for item x 100 Total portion sales of all menu items

OH 4-28 Menu Item Popularity Index Menu ItemNumber SoldPopularity Index % Strip Steak Ginger Shrimp Duck Breast213.3 Lamb Chops111.8 Pork Loin457.3 Vegetarian Burrito508.2 Veal Steak Steak Diane Total Covers %

OH 4-29 Menu Engineering Method of menu evaluation Considers contribution margin (selling price minus menu item food cost) Considers popularity (number of items sold)

OH 4-30 Menu Engineering Menu Item Number Sold Pop Index % Food Cost Sales Item CM Total Cost Total Sales Menu CM Strip Steak $7.50$23.65$16.15$ $ $ Ginger Shrimp $5.20$18.00$12.80$603.20$ $ Duck Breast 213.3$7.30$21.50$14.20$153.30$451.50$ Lamb Chops 111.8$6.90$21.50$14.60$75.90$236.50$ Pork Loin 457.3$6.30$20.50$14.20$283.50$922.50$ Vegetarian Burrito 508.2$3.80$16.50$12.70$190.00$825.00$ Veal Steak $6.35$20.85$14.50$762.00$ $ Steak Diane $7.75$24.75$17.00$860.25$ $ %$ $13202$ $14.84

OH 4-31 Menu Analysis Popularity Contribution Margin

OH 4-32 Monitoring Menu-Related Concerns Three factors must be considered and compared when analyzing food cost efficiency. Standard food cost percentage Composite food cost percentage Actual food cost percentage

OH 4-33 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 4-34 Monitoring Menu-Related Concerns continued Composite (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 = Composite food cost percent

OH 4-35 Monitoring Menu-Related Concerns continued Actual food cost percentage Reported on the restaurant’s income statement

OH 4-36 Monitoring Menu Related Concerns continued Summary If the composite percentage exceeds the standard percentage, take steps to manage sales activity. If the actual food cost percentage exceeds the composite percentage, take steps to improve food controls.

OH 4-37 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 restaurant’s 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 4-38 Key Term Review Composite food cost percentage Factor method Markup Markup differentiation Markup on cost method

OH 4-39 Key Term Review continued Menu engineering Menu product mix Price-value relationship Pro forma income statement Texas Restaurant Association (TRA) markup method

OH 4-40 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.