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Menu Composition Chap 4

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Sam La Duca

on 29 January 2016

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Transcript of Menu Composition Chap 4

Pricing the Menu
Understanding the Income Statement
The Gross Markup Method
takes into account all expenses and profit as well as food cost to determine selling price.
many restauranteurs believe the total income statement must be taken into account to ensure profitability.
limited to restaurants where the selling price on the menu are in the same general range.
Examples: ?
Figure 4-5
$330,730 (gross profit)
75,000 (customers served)
$330,730/75,000=
$4.41 (cost per customer)
$4.41
+ $2.18 =
$6.59 (selling price)
Controllable Expenses- contains all the expenses that can be controlled by management.
Cleaning Supplies
Office Supplies
Paper Goods
Last chapter we figured out the costs of a meal, now we are going to determine the
selling price
!
Objectives:
Explain the makeup of an income statement including the interrelationships of controllable and non-controllable cost and their effect on sales and profits.

Describe several of the important markup methods, including the factor methods, including the factor method, markup on cost, gross markup, ratio method, and the TRA method, as well as the relationship each has with the others.

Explain the concept of psychological pricing and its importance in selecting the final menu price.
Cost of Food Sold
the dollar amount of food that was used during the period.
Opening Inventory
+ Purchases

= Food Available for Sale
- Closing Inventory

Cost of Food Sold
Markup Methods
With the understanding of where profit comes from, there are various methods of marking up costs to determine the
selling price
.
No-method method
most popular method
charging what the competition charges
Things to remember: no two restaurants are alike
(location, labor, rent, insurance, etc.)
The meal costs us
$2.18
to make. What should the selling price be?
We will learn !
Remember, you as the menu planner also have the responsibility of making sure the company will make a profit!
What is the object of any business?
Why is it important?

In this chapter, "profit starts with the menu listing price"
Are all food operations required to make a profit? Examples?
It is necessary to examine an income statement, to fully understand the relationship between the menu selling price and profit.
Is this class now an accounting class?
You need some basic knowledge!
What is a P & L statement?
Begin reading Page 76
Cheatum & Steele restaurant
Sales (year) - burgers $30,000, fries $10,000. What is the total sales for just serving these two menu items over a years period? Sales total $500,000 what else is selling?
When analyzing an income statement, figures are expressed in dollars and percentages.
Dollars- brought in (sales), expended (costs)

Ex: Cost of food - $169, 270
.
Percentages - put dollar numbers on an even scale to compare periods.

Ex:

Cost of food (food cost) - 34%
Analysis of percentages makes it possible to relate cost directly to what happened to sales.
2nd paragraph
3rd paragraph
Year 2 sales: sales are $800,000 and cost of food was $250,000. What is the cost of food percentage?
Year 3 sales: sales are $980,000 and cost of food was $500,000. What is the cost of food percentage?
In analyzing the income statement, is their a strength or weekness in year 3?
$8,250.
+$168,500.
$176,750
-$7,480.
$169,270.
page 76 bottom and page 78 top is another example
$120.
+$400.
$520.
-$40.
$480.
Example: page 76-78
Gross Profit
The amount of money made on the cost of food.
taking to the bank!
What is the equation? What is the dollar amount? What i the percentage?
Labor Expenses -
total payroll for the restaurant.
Can broken down into different accounts:
management salaries
hourly personnel
payroll taxes (FICA-SS tax, medicare tax, etc.)
Fringe benefits
What are the largest operating costs controlled by management?
What are they called?
Non controllable Expenses
- includes all fixed expenses that management has little (if any) control over.
Rent
Utilities
Insurance
Property Taxes


Total Expenses: include labor, controllable and noncontrollable expenses.
$297,630.
Subtracting your Gross Profit from your expenses, equals your pre-tax profit.
$33,100
(6%)
Facts:
all restaurants are in business to make a profit
all restaurants have costs
in order for a restaurant to make a profit, sales must exceed costs.
menu planner must charge a price that covers not only the cost of goods (food cost), but all the other expenses and profit!
What is markup?
the amount by which a price is increased
the amount added by a seller to the cost of a commodity (something of use) to cover expenses and profit in fixing the selling price.
There are many formulas to help the menu writer, in determining what should be charged for an item.
We will explore five:

factor method, markup on cost method, gross markup method, ratio method, and the TRA method.

The Factor Method:
simple formula to use
food cost must already be determined (ex:34%)
used by established restaurants where past performance indicates that the gross profit is sufficient to cover all expenses and profit.
Do you think many restaurants use this method?
Why?
Formula: page 80 (student to read)
Figure 4-3
Food cost percentage: 34%
1.00/0.34= 2.94 (factor)
2.94 x $2.18 (cost of item)=
$6.41 (selling price)


The Markup on Cost method:
simple method
again, food cost must be already be determined (Ex 34%)
Figure 4-4
Food cost percentage: 34%
$2.18/0.34=
$6.41 (selling price)
We will be using a menu item that cost $2.18 through each method.
Problem
:
What if the number of customers served was 60,000? What would be the selling price?
Ratio Method:
this method also accounts for expenses and profit.
must have valid income statement because the numbers used to develop the ratio are total expenses.
Figure 4-5
Obtain cost of food sold from income statement - $169,270
Add together all expenses and profit (same as gross profit) - $330,730
Divide all expenses and profit by cost of food sold:
$330,730/$169,270 = 1.95 (is your ratio)
Add 1.00 (sales as a percentage) to the ratio - 1.95+1.00 = 2.95
Multiply this by cost of item - 2.95 x $2.18 =
$6.43 (selling price)

$330,730 / $169,270 = 1.95
1.95 + 1.00 = 2.95
2.95 x $2.18 =
$6.43

The TRA Method
more complex
this method also accounts for expenses (except food cost)and profit in determining a selling price.
Figure 4-5
Add :
Labor Cost Percentage: 35% (0.34)
Operating Costs Percentage: 25% (0.25)
Profit +6% (0.06)
66$ (0.66) cost of food
Take cost percentage and subtract form 1.00(sales)
1.00-0.66 = 0.34 (divisor, food cost percentage)
Divide the cost of the meal by the divisor
$2.19/0.34=
$6.41 (selling price)
Problem
:You want to increase profit by 2%? What would be the selling price?
Psychological Pricing
Once a selling price is determined, next is to consider psychological pricing
used to manage customer response to the numbers making up a menu price.
Psychological pricing theories take into account the customer and how he or she reacts to certain pricing structures.
The primary theory behind psychological pricing is the odd-cents price.
This pricing method reduces the restaurants customers' resistance to buy because it gives the illusion of a discount.
Instead of charging a $1.50 for an item, charge $1.49, and the customers perceives this as a better price-value relationship
.
MID TERM EXAM: CHAPTERS 1-4
Selling prices of under $7
best ending figures are 9 and 5
Example: 1.99 or 6.95
often used by which type of restaurant?
Selling prices $7 to $10
best ending figure is 5
Example: $9.95 /

$9.99? Thoughts?
Selling prices higher than $10
best ending figure is 0
Example: $11.00 and 14.00
often used by which type of restaurant?
how else can it be written? think about the 0's
Important factors:
the importance of the left-most digit

Example: .69 to .71 .67 to .69
greater distance from 69 to 71 than between 67 and 69 (only a 2 cents difference)
the length of the price or the number of digits in the price. Guest also perceives distance here.

Example: $9.99 and $10.25 $9.55 and $9.99
Which do you perceive as a greater distance when increasing prices?
Strategy: important when increasing prices. Refer to Chilli's as example
Factors to accomplish earnings?
When ________ exceed _______, _______ are made.
Mc Donalds...Do menu items cater to customers? Lost sales? What type of restaurant would do well next to a Costco?
What if your goal was to open your concept within close range of every Costco in the U.S.
What concept opens up next to every Home Depot?
Controls in place - waste and theft? How do we control these? Lost?
Menu selling price - starting point of making a profit! Selling price to high? Selling price to low?
What if the selling price is too high?
What if the selling price is too low?
At Google, ___ food is fuel for _______.
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