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

OH 4-1

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

Controlling Foodservice Costs

4OH 4-1

OH 4-2

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.

OH 4-3

Menu Prices

If they are too high;

Sales suffer

If they are too low;

Profits suffer

OH 4-4

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)

OH 4-5

Pro Forma Income Statement as Budget Standard

OH 4-6

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 4-7

Menu Pricing Methods

The Texas Restaurant Association (TRA) Markup Method

The Factor Method

The Markup on Cost Method

OH 4-8

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 4-9

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

OH 4-10

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 4-11

The Texas Restaurant Association (TRA) Markup Method continued

The Texas Restaurant Association’s menu pricing formula considers labor costs when determining selling prices.

OH 4-12

The Factor Method

Determines menu prices based upon the standard (target) food cost percentage

Involves a two-step process

OH 4-13

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 4-14

The Factor Method continued

Step 2 – Calculate the menu price using the following formula.

Factor x Menu item cost = Selling price

2.86 x $4.10 = $11.73

OH 4-15

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 4-16

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 4-17

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 4-18

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 4-19

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 4-20

Composite Food Cost Percent

Wrong way to determine average food cost percent

Menu Item # Sold Unit Cost

Total Cost Selling Price

Food Cost %

Total Sales

Hamburger 20 $2.00 $40.00 $5.95 34% $119.00

Fries 5 $0.50 $2.50 1.25 40% $6.25

Soda 10 $0.15 $1.50 .79 19% $7.90

Total 35 $44.50 $133.15

34+40+19=

93÷ 3 = 31% FC

OH 4-21

Composite Food Cost Percent continued

Menu Item # Sold Unit Cost

Total Cost Selling Price

Food Cost %

Total Sales

Hamburger 20 $2.00 $40.00 $5.95 34% $119.00

Fries 5 $0.50 $2.50 1.25 40% $6.25

Soda 10 $0.15 $1.50 .79 19% $7.90

Total 35 $44.00 $133.15

$44.50 ÷ $133.15 = 33% FC

Right way to determine is by weighted average food cost

OH 4-22

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 4-23

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 4-24

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 4-25

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 4-26

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 100Total portion sales of all menu items

OH 4-27

Menu Item Popularity Index

Menu Item Number Sold Popularity Index %

Strip Steak 145 23.4

Ginger Shrimp 116 18.7

Duck Breast 21 3.3

Lamb Chops 11 1.8

Pork Loin 45 7.3

Vegetarian Burrito 50 8.2

Veal Steak 120 19.4

Steak Diane 111 17.9

Total Covers 619 100%

OH 4-28

Menu Engineering (Contribution Analysis)

Method of menu evaluation or analysis Considers menu product mix

Considers contribution margin (selling price minus menu item food cost)

Considers popularity (number of items sold)

OH 4-29

Menu EngineeringMenu Item

Number Sold

Pop Index %

Food Cost

Selling Price

Item CM

Total Cost

Total Sales

Menu CM

Strip Steak 145 23.4 $7.50 $23.65 $16.15

Ginger Shrimp

116 18.7 $5.20 $18.00 $12.80

Duck Breast

21 3.3 $7.30 $21.50 $14.20

Lamb Chops

11 1.8 $6.90 $22.00 $15.10

Pork Loin 45 7.3 $6.30 $20.50 $14.20

Vegetarian Burrito

50 8.2 $3.80 $16.50 $12.70

Veal Steak 120 19.4 $6.35 $20.85 $14.50

Steak Diane

111 17.9 $7.75 $24.75 $17.00

619 100%

Average 77.38 12.5%

OH 4-30

Menu EngineeringMenu Item

Number Sold

Pop Index %

Food Cost

Selling Price

Item CM

Total Cost

Total Sales

Menu CM

Strip Steak 145 23.4 $7.50 $23.65 $16.15 $1087.50

Ginger Shrimp

116 18.7 $5.20 $18.00 $12.80 $603.20

Duck Breast

21 3.3 $7.30 $21.50 $14.20 $153.30

Lamb Chops

11 1.8 $6.90 $22.00 $15.10 $75.90

Pork Loin 45 7.3 $6.30 $20.50 $14.20 $283.50

Vegetarian Burrito

50 8.2 $3.80 $16.50 $12.70 $190.00

Veal Steak 120 19.4 $6.35 $20.85 $14.50 $762.00

Steak Diane

111 17.9 $7.75 $24.75 $17.00 $860.25

619 100% $4015.65

Average 77.38 12.5%

OH 4-31

Menu EngineeringMenu Item

Number Sold

Pop Index %

Food Cost

Selling Price

Item CM

Total Cost

Total Sales

Menu CM

Strip Steak 145 23.4 $7.50 $23.65 $16.15 $1087.50 $3429.25

Ginger Shrimp

116 18.7 $5.20 $18.00 $12.80 $603.20 $2088.00

Duck Breast

21 3.3 $7.30 $21.50 $14.20 $153.30 $451.50

Lamb Chops

11 1.8 $6.90 $22.00 $15.10 $75.90 $242.05

Pork Loin 45 7.3 $6.30 $20.50 $14.20 $283.50 $922.50

Vegetarian Burrito

50 8.2 $3.80 $16.50 $12.70 $190.00 $825.00

Veal Steak 120 19.4 $6.35 $20.85 $14.50 $762.00 $2502.00

Steak Diane

111 17.9 $7.75 $24.75 $17.00 $860.25 $2747.25

619 100% $4015.65 $13207.55

Average 77.38 12.5% 30.4%

OH 4-32

Menu EngineeringMenu Item

Number Sold

Pop Index %

Food Cost

Selling Price

Item CM

Total Cost

Total Sales

Menu CM

Strip Steak 145 23.4 $7.50 $23.65 $16.15 $1087.50 $3429.25 $2341.75

Ginger Shrimp

116 18.7 $5.20 $18.00 $12.80 $603.20 $2088.00 $1484.80

Duck Breast

21 3.3 $7.30 $21.50 $14.20 $153.30 $451.50 $298.20

Lamb Chops

11 1.8 $6.90 $22.00 $15.10 $75.90 $242.05 $166.10

Pork Loin 45 7.3 $6.30 $20.50 $14.20 $283.50 $922.50 $639.00

Vegetarian Burrito

50 8.2 $3.80 $16.50 $12.70 $190.00 $825.00 $635.00

Veal Steak 120 19.4 $6.35 $20.85 $14.50 $762.00 $2502.00 $1740.00

Steak Diane

111 17.9 $7.75 $24.75 $17.00 $860.25 $2747.25 $1887.00

619 100% $4015.65 $13207.55 $9191.85

Average 77.38 12.5% 30.4% $14.85

OH 4-33

Menu Engineering

Menu Item Pop Category CM CategoryMenu Item Class

Strip Steak H H Star

Ginger Shrimp H L Plow Horse

Duck Breast L L Dog

Lamb Chops L H Puzzle

Pork Loin L L Dog

Burrito L L Dog

Veal Steak H L Plow Horse

Steak Diane H H Star

OH 4-34

Menu Analysis

Contribution Margin

Pop

ula

rity

High

HighLow

H/L H/H

L/L L/H

OH 4-35

Other Menu Analysis Methods Miller Matrix

Same process but evaluate food cost and popularity Weighted food cost is factor Winners (similar to stars) = low food cost, high popularity Goal to achieve sales mix with 60% of items in low food

cost category

Cost Margin Analysis Combination of Miller Matix and Contribution Analysis Methodology includes evaluation of popularity,

contribution margin and food cost Primes (similar to stars) = low cost, high contribution

OH 4-36

Menu Management Decisions

Must consider more than just sales dollars, item popularity, and contribution margins Preparation and service costs

Restaurant’s image

Customers’ expectations

OH 4-37

The Pareto Principle

A few of the top selling menu items account for a large majority of sales in a category.

Removing the two or three least popular items in a category will not likely reduce the total sales of items in the category.

OH 4-38

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 4-39

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 4-40

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 4-41

Monitoring Menu-Related Concerns continued

Actual food cost percentage Reported on the restaurant’s income statement

OH 4-42

Monitoring Menu Related Concerns continued

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 4-43

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 methodB. Markup on cost methodC. Texas Restaurant Association (TRA) methodD. 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 4-44

Key Term Review

Composite food cost percentage

Factor method

Markup

Markup differentiation

Markup on cost method

OH 4-45

Key Term Review continued

Menu engineering

Menu product mix

Price-value relationship

Pro forma income statement

Texas Restaurant Association (TRA) markup method

OH 4-46

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.