1. Agenda Questions regarding Chapter 2 & 3 workbook
Chapter 4: Cost-Volume-Profit Relationships
PowerPoint
Workbook
Chapter 5:
Next week

2. Cost-Volume-Profit Relationships4
Controlling Foodservice Costs
OH 5-2

3. Chapter Learning Objectives
Explain Variable Costs
Describe the variable rate
Describe the components of the contribution margin
Describe the contribution margin
Calculate the variable cost and rate, contribution margin and rate, and calculate the break-even point in sales dollars and sales units
Determine which formula to use for various calculations
Instructor’s Notes
Indicate that these objectives (competencies) drive the information in the chapter and in this session.

4. Components of Sales
Dollar terms: Without understanding where sales revenue is spent, it is hard to control costs and create profitability.
Since profitability is why most operations are in business, formulas to calculate profit are needed.

5. Variable Costs
Costs that will change with the increase or decrease in the volume of business
Examples: food & beverage costs, supplies, wages & benefits
Do variable costs include salaried employees?
Actual cost of the product and service that is for sale

6. Contribution Margin
Contribution Margin is composed of fixed costs and the profit generated by sales
Fixed costs:
Examples: salaried employees & their benefits, rent, equipment depreciation, insurance, utilities, etc.
Profit generated by sales – Bottom line

7. Examples of Contribution Margin
Example of an actual Contribution Analysis used
Let’s turn to page 48 in the text; example problem

8. Components of Sales
Percentage terms: The percent of each dollar in sales that goes towards different expenses is needed in forecasting, planning and analysis of financial data.

9. Variable Rate and Contribution Rate
In Chapters 2, what was the formula we used to calculate the food cost percent?
When comparing variable rate and contribution rate to sales, we use the exact same formula.
Let’s turn to page 50 in the text book
The variable rate is the percent of costs that we can control

10. Break-Even Point
This formula is used to calculate either the dollar sales, or unit sales, needed to break even in a business.
Let’s turn to page 52 of the text
How does profit fit into the break even analysis?
Why would you need to know the number of units to be sold in a break even analysis?

11. Average Variable Costs
Average contribution margins take into account the number of sales of each item as well as the contribution margin of each item. This information is used to compare one item to another and to analyze overall financial data
Let’s turn to page 54 in the text, example problem

12. Improving Profit by Changing the Break-Even Point
Three items we can control
Raise prices
Variable cost
Evaluate quality

13. Workbook Chapter 4

14. Controlling Food Costs in Purchasing5
Controlling Foodservice Costs
OH 5-14

15. Chapter Learning Objectives
Explain how a specification becomes a control in the purchasing function.
Explain the parts of a purchase specification and a purchase order (Purchase Specification).
Explain various purchasing methods and their effect on the price of goods.
Use formulas including:
Periodic ordering amount, Perpetual ordering amount, As purchased (AP), Edible portion (EP) for both food quantity and food cost.
Instructor’s Notes
Indicate that these objectives (competencies) drive the information in the chapter and in this session.

16. Chapter Learning Objectives continued
Calculate a yield test that identifies the difference between as purchased (AP) price and edible portion (EP) cost.
Identify factors that affect the purchase price of goods.
Distinguish between perishable and nonperishable goods and their relationship to the purchasing cycle.
Calculate the amount of goods to purchase for catered events.
Instructor’s Notes
Indicate that these objectives (competencies) drive the information in the chapter and in this session.

17. Who Purchases? Purchasing agent Manager Chef Head cook
Trusted staff member
The buyer maintains quality standards!
Instructor’s Notes
Ask students to identify characteristics of effective purchasers.

18. Who Purchases? continued
The buyer is responsible for ensuring that quality standards are met during the purchasing and delivery process.
Instructor’s Notes
Explain that a food’s quality is typically at its highest when it is delivered to the restaurant, and usually declines after that.
Ask students, “How do buyers know the quality levels established by management?”

19. The Food Specification
Is a control device
Lists the product’s name
Lists its intended use
Identifies the desired brand and grade
Identifies the desired size
Identifies the desired variety
Identifies packing requirements
Details delivery requirements
Explains payment terms
Instructor’s Notes
Ask students what they would want their supplier to do if he/she could not deliver an ingredient they had purchased.
Discuss the concepts of “acceptable substitutions” and “or equal” products.

20. The Food Specification continued
Specifications should describe exactly what buyers want to buy.
Instructor’s Notes
Ask students how important they believe extensive product knowledge is for a food buyer.
Ask students how important they believe it is for suppliers to have extensive product knowledge.

21. Purchase Orders
The official written record of the items the buyer wants to purchase
Instructor’s Notes
Ask students for ideas about why it is important that restaurant purchasing agents keep accurate records of what they have purchased.
Ask students, “What information should a buyer write down when he or she makes a purchase?”

22. Purchase Order Information
A unique identification number
The name and address of the restaurant
Date of the order
Signature of the buyer
The supplier’s contact information
Date of delivery
The name, quantity, and delivery unit of each item ordered
Total (extended) cost of the order
Instructor’s Notes
Point out that other types of information that may be noted on the purchase order include delivery and payment terms.
Mention that cost “extensions” (price x quantity) should not be taken for granted, even if they have been generated by a computer.

23. Ordering Methods page 21 workbook
Periodic order method – example p. 62 text
Minimum par level
Perpetual ordering method
Safety stock

24. Inventory Methods page 21 workbook
Perpetual inventory method
Physical inventory method

25. Purchase Methods page 23 in workbook
Competitive quotes
Open bids
Market Quotation Sheet
Sealed bids
Cost-plus
Co-operative
One-stop shop
Contract
Warehouse buying
Standing order
Commissary/Centrali zed purchasing
On-Line purchasing
Instructor’s Notes
Explain that a restaurant’s size may have a significant influence on the purchase method utilized.
Review the “pros and cons” of each system in Exhibit 5f (page 66 in the chapter).

26. What to Buy Avoid buying the “cheapest.” Use purchase specifications.
Buy at the best cost from sellers who meet or exceed the purchase specifications.
Consider both AP price and EP cost.
Instructor’s Notes
Ask students to identify characteristics that would make a “lowest cost” bidder undesirable as a supplier partner. Answers—poor sanitation by delivery persons, sporadic and/or late deliveries, and excessive invoicing errors.

27. Two Kinds of Costs
As purchased (AP)—the cost of food as delivered to the restaurant
Edible portion (EP)—the cost of food as served to the guest
Instructor’s Notes
Ask students to identify foods in which the AP price and EP cost would vary greatly. Examples—fresh fish, poultry, and roasted, bone-in meats.

28. AP vs. EP Form
Items, such as fresh whole fish, will weigh much less in their EP form than in their AP form.
Instructor’s Notes
Ask, “Which form of the fish is shown in this picture—as purchased (AP) or edible portion (EP)?”
Note that menu item food costs are based on EP cost, not AP price.

29. Calculating Quantity to Purchase
EPQ = Edible Portion Quantity
APQ = As Purchased Quantity
EPQ
(Part)
APQ x Y%
(Whole)

30. Yield % Charts Yield % Charts Other resources Approximate Weight/Each
Item description
Yield %
Other resources
Book of Yields - Francis Talyn Lynch
Culinary Calculators

31. Using Yield % Charts Yield % charts are only approximate
You must do your own yield tests on the actual product you are using in order to get completely accurate figures.
Some factors that affect yield:
Employee skill level
Size of the product
Condition or quality of the product

32. Calculating the APQ APQ = EPQ Yield Percent
Used to determine how much product you need to buy when you know how much finished product is needed, and you know what the yield % is.

33. Calculating the EPQ APQ x Yield % = EPQ
This formula is used to calculate how much usable product you can get when you know the As Purchased Quantity and the Yield %

34. Calculating How Much to Buy
Need ten pounds of onions.
Yield percentage of onions is 84.2%.
How many pounds will you buy?
EP amount needed ÷
Yield percentage =
AP amount to purchase ÷
11.87, or 11.9
Instructor’s Notes
Walk students through the calculation of AP amount when the EP amount is known.
Note that the quality of the item must be carefully checked at time of receiving to help assure that the quality of product ordered is, in fact, the quality of product received and available for processing by the restaurant’s staff.
Point out that an alternate way to calculate the amount to purchase is to calculate the purchase factor and to multiply the EP amount needed by that factor.
Explain that the purchase factor computed is for the very specific AP form of ingredient that is detailed in the restaurant's specifications.
Walk students through an example of computing the purchase factor and then using that factor to determine the AP amount ÷ (EP%) = 1.19 purchase factor; 10.0 lb (EP needed) x 1.19 = 11.9 lb (AP amount). Point out the similarities.

35. Calculating Quantity to Purchase
Let’s turn to page 70 in the text
What is the difference
10 lbs. of carrots, peeled and sliced
10 lbs. of peeled and sliced carrots
How do you calculate how much to purchase in each one?

36. Calculating EP Cost Two steps
Step 1 – Calculate product’s yield percentage.
Or you can look up the yield %
Edible portion (EP) weight ÷
As purchased (AP) weight =
EP percentage ÷
0.842 or 84.2%
Instructor’s Notes
Explain that AP ingredients must be cleaned, peeled, trimmed, and sliced to determine their actual EP yield.
Indicate that EP yield is influenced by the quality of product purchased in AP form.
Point out that in this example, 9.5 pounds of unpeeled onions yielded 8 pounds of prepared onion.

37. Calculating EP Cost continued
Step 2 – Calculate EP cost.
Example—the EP cost of one pound of onions
Note: the EPC number, if it is LESS THAN the APC, something is wrong! An item never costs less in the cleaned/trimmed form.
As purchased (AP) price ÷
Edible portion (EP) percentage =
Edible portion (EP) cost
$0.39/lb AP ÷
$0.46/lb EP
Instructor’s Notes
Explain that EP cost, not AP price, is the “real” cost of an ingredient used to determine a menu item’s food cost.
Ask, “What is the ‘real’ cost of one pound of onions in this example?”
Ask, “Why is it important that the buyer know the EP cost of an item as well as the AP price of that item?”
Point out that by knowing both the AP price and the EP cost, a buyer is in a better position to make decisions about which purchasing method to use and from which supplier to purchase each item.

38. Other Factors Affecting Purchasing
Management complacency
Payment history
Gift acceptance policies
Instructor’s Notes
Ask students if they believe managers should be allowed to accept gifts from suppliers. If so, what, if any, limitations should be placed on the value of the gifts?
Ask students the following question, “Do you think a manager’s purchasing decisions are influenced by the acceptance of gifts and favors from suppliers?”

39. When to Buy Purchase perishable items daily or every few days.
Purchase nonperishable items weekly or monthly.
Instructor’s Notes
Ask students to name some highly perishable items that are served where they work or have worked.
Ask how the long the items could stay in peak condition after they had been delivered to the restaurant.

40. Perishable Product Purchases
Determine the amount of product that will be used between deliveries.
Count what is on hand.
Subtract the amount on hand from the amount that will be used.
The result is the amount to purchase.
(Note: Some managers purchase a small “extra” or “cushion” amount in case sales levels exceed forecasts.)
Instructor’s Notes
Ask students to cite factors that could influence the size of the perishable food “cushion” that is maintained by a manager. Answers include the item’s shelf life, its cost, the restaurant’s storage capability, and the importance of avoiding outages of the item.

41. Nonperishable Quantity to Purchase
Most common method is par stock method.
Steps
Determine quantity (par stock) that must be on hand between orders for each item.
Before ordering, take inventory.
Subtract on hand quantity from par stock quantity.
Difference is quantity to order
Instructor’s Notes
Point out that the par stock method works best for restaurant and foodservice organizations that have a menu that does not change frequently.
Explain how par stock is determined.
Review the steps in using par stock to determine the quantity to order.

42. Catering Purchases
Step 1 – Determine the servings per purchasing unit (SPU).
Purchasing unit ÷
Portion size =
Servings per purchasing unit (SPU)
Instructor’s Notes
Remind students that the purchasing unit and the portion size must be in the same unit of measure. For example, if the portion size is in ounces, the purchasing unit must also be in ounces.

43. Catering Purchases continued
Step 2 – Determine the purchase factor.
Recall the formula for EP percentage.
SPU x
EP percentage =
Purchase factor (PF)
Instructor’s Notes
Remind students that EP% is the percentage amount left from an ingredient after it has been cleaned, washed, trimmed, sliced, etc.
Edible portion (EP) weight ÷
As purchased (AP) weight =
EP percentage

44. Catering Purchases continued
Step 3 – Determine the amount to purchase.
Number of guests to serve ÷
Purchase factor (PF) =
Amount to purchase
Instructor’s Notes
If applicable, ask students to look at page 78 in the chapter to review the math from the example listed there.
If desired, provide additional examples.

45. How Would You Answer the Following Questions?
A purchase order is best prepared by the (buyer/ seller) of the items to be purchased.
With effective purchasing techniques in place, a restaurant's EP costs can often be lower than its AP costs. (True/False)
EP weight divided by AP weight results in
AP percentage
AP cost
EP cost
EP percentage
A butcher’s test is a test of (yield/quality).
Instructor’s Notes;
Answers:
Buyer
False D
Yield
Note: indicate that the last part of this discussion will provide a review of definitions for the key terms used in the chapter.

46. Key Term Review As served (AS) Buyer Commissary Competitive quotes
Cost plus
Invoice
Instructor’s Notes
As served (AS)—amount available to serve to the customer
Butcher test—process in which a wholesale cut of meat is broken down into a retail cut and the trim, bone, and waste are analyzed and recorded to arrive at an EP cost for the retail cut
Buyer—person who purchases products for the restaurant
Commissary—purchasing method used by chains and franchised units; orders from individual units are consolidated, and the commissary purchases the total quantity needed from preferred suppliers
Competitive quotes—purchasing method in which the buyer gives suppliers a market quotation sheet indicating items and applicable quantities to be purchased. Suppliers then provide a price quote for the items.
Cost plus—purchasing method in which a restaurant’s purchases are invoiced at the supplier’s cost plus an agreed-upon markup
Invoice—bill that accompanies the delivery of products

47. Key Term Review continued
Market quotation sheet
Nonperishable goods
One-stop shop
Par stock
Perishable goods
Purchase order
Quotes
Instructor’s Notes
Market quotation sheet—standardized form that is given to two or more suppliers who are then asked to provide a price quote for the items needed
Nonperishable goods—products that have a relatively long shelf life
One-stop shop—purchasing method in which most, if not all, of an operation’s products are purchased from one supplier
Par stock—the level of inventory that must always be in stock in the restaurant
Perishable goods—products with a relatively short shelf life (usually one to three days)
Purchase order—form listing products to be purchased, agreed-upon price, required delivery date, and other important information that a buyer sends to a supplier as confirmation for a purchase
Quotes—prices cited by a supplier for a specific product

48. Key Term Review continued
Sealed bid
Specification
Standing order
Yield chart
Yield percentage
Yield test
Instructor’s Notes
Sealed bid—prices provided by a supplier who does not have knowledge of the prices proposed by other bids because each bid is submitted in a “sealed envelope”
Specification—document listing the product name, its intended use, grade, size, and other product characteristics that represent the quality standard of the item as established by the buyer
Standing order—purchasing method in which a par stock is established by the operation and then that level of inventory is maintained by the supplier
Yield chart—listing of the EP weight of products (as opposed to their AP weight) and an average yield percentage
Yield percentage—the EP weight of a product divided by its AP weight
Yield test—analysis done to determine the difference between a product’s AP weight and its EP weight

49. Chapter Learning Objectives— What Did You Learn?
Explain how a specification becomes a control in the purchasing function.
Explain the parts of a purchase specification and of a purchase order.
Explain various purchasing methods and their effect on the price of goods.
Calculate a yield test that identifies the difference between AP price and EP cost.
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.

50. Chapter Learning Objectives— What Did You Learn? continued
Identify factors that affect the purchase price of goods.
Distinguish between perishable and nonperishable goods and their relationship to the purchasing cycle.
Calculate the par stock amount of an item to order.
Calculate the amount to purchase, using EP amount and yield percent.
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.

51. Chapter Learning Objectives— What Did You Learn? continued
Calculate the amount of goods to purchase for catered events.
Calculate a butcher test, or meat yield test.
Describe the proper procedures for receiving goods.
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.