Prime cost methods

chapter 6
Calculating Sales
Price and Food
Class Name
Instructor Name
Date, Semester
Foundations of Cost Control
Daniel Traster
Menu Pricing Methods
• Multiple approaches, all valid.
• Sales prices for a dish must cover the item’s food cost
plus extra to help cover all other non-food costs.
• Contribution Margin = the portion of a dish’s sales
price that is left after the item’s cost per portion is
Calculating Menu Price Using Food Cost
SP = FC ÷ FC%
SP x FC%
Food Cost Percent Method
• Food Cost = Cost per portion from recipe spreadsheet
• Industry FC% often ranges 20-40%, but most operate
in the low to mid 30’s.
• Selecting the right FC% is the biggest challenge
Example 6a
What is the sales price for a veal entrée with a cost
per portion of $5.71, if the restaurant targets a food
cost percent of 30.2%?
SP = FC ÷ FC%
= $5.71 ÷ 0.302
= $18.91
Overhead-Contribution Method
The overhead-contribution method uses budgets
and historical data to determine overhead and
profit costs and then FC%.
• CM% = Contribution Margin %
• CM% = (overhead + profit) ÷ sales
• FC% = 100% - CM% (here, CM% is in % form)
• SP = FC ÷ FC% (in decimal form)
Example 6b
A restaurant has overhead of $710,000 and wants
profit of $47,000 from forecast sales of $1,000,000.
Using overhead-contribution method, determine
FC% and sales price for grouper with a cost per
portion of $5.28.
CM% = ($710,000 + $47,000) ÷ $1,000,000
= 75.7%
FC% = 100% - 75.7% = 24.3%
SP = $5.28 ÷ 0.243 = $21.79
Texas Restaurant Association (TRA)
The TRA method is similar to the overheadcontribution, but profit percent (and thus FC%) can
vary by menu category or even by menu item.
• FC% = 100% - overhead % - profit %
• Low-profit entrées and high-profit other categories
• Higher profit on slow-moving items
• SP = FC ÷ FC%
Calculating Menu Prices Using Prime Costs
Prime cost definitions:
1. Combined total cost of food, beverage, and labor
cost (bird’s eye perspective)
2. Combined total cost per portion and direct labor
cost needed to prepare a dish (single portion
Direct Labor Cost is determined by observing
staff productivity and factoring employee
hourly wage rates
Prime Cost Method
Prime Cost = Food Cost + Direct Labor Cost
Sales Price = Prime Cost X Price Factor
Price factor may start off randomly, but it
gets refined with historical data
Example 6c
A restaurant uses a price factor of 3.1. Chicken
roulade costs $1.92 per portion with a direct labor
cost of $1.65. Determine sales price using the
prime cost method.
Prime Cost = $1.92 + $1.65
= $3.57
Sales Price = $3.57 X 3.1
= $11.07
Actual Pricing Method
Uses budget percents to determine price divisor to
apply to dish’s prime cost.
Price Divisor =
100% - (Variable Cost % + Fixed Cost % + Profit %)
Sales Price = Prime Cost ÷ Price Divisor
Example 6d
In a given restaurant, variable cost is 29%, fixed
cost is 12%, profit is 6%. Using Actual Price Method,
calculate sales price for a dish costing $3.09 per
portion with a direct labor cost of $0.88
Price Divisor = 100% - (29% + 12% +6%) = 53%
Prime Cost = $3.09 + $0.88 = $3.97
SP = $3.97 ÷ 0.53 = $7.49
Gross Profit Pricing Method
Gross profit is money made from sales after food
and beverage are deducted (like contribution
margin, but it refers to total sales over a period of
Gross profit per customer =
gross profit over a period ÷ customers over that period
Sales Price =
Cost per portion + Gross profit per customer
Example 6e
Each month a restaurant has gross profit of $2,890
and serves 1,000 customers. A sandwich costs
$1.47 per portion. Using the gross profit method,
determine a sales price for the sandwich.
Gross profit per customer
= $2,890 ÷ 1,000
= $2.89
Sales Price = $1.47 + $2.89 = $4.36
Why Use Gross Profit Method
• Appropriate with low-cost items that are similar in
costs to each other – like a coffee shop
• Because gross profit per customer is added (not
multiplied), sales prices remain in a narrow range for
items that only vary in cost by a few pennies but may
be quite different percentage-wise. ($0.20 vs. $0.40)
Base-Price Method
Base-price method starts with sales price and
works backward to create target food cost per
portion. It is often used in corporate cafeterias and
fast food (think: $0.99 menu).
1. Determine desired sales price
2. FC = SP X FC%
3. Modify recipe to hit FC target
Matching Competitors’ Prices
Keeps sales prices competitive, but…
• Risky because you don’t know the competitors’ costs
and special arrangements.
• Family businesses may use free labor from family
• Large operations may get cheap purveyor prices for
buying in bulk
• You may not be able to afford to sell at their prices.
Choosing the Best Pricing Method
Prime cost methods work well when preparation
time for dishes varies greatly.
Base price approach is best when a price point is
required to remain competitive.
Food cost percent methods are easy to use and
work well when all dishes have similar direct
labor costs and food costs are not below 20%.
There is no best method for everyone!
Factors that Impact Final Menu Pricing
• Competition (studied through a competitive analysis)
• Price Sensitivity of a product
• Perceived Value
• Product Differentiation – how greatly a product differs
from similar competitor products
Psychological Pricing
• Guests are most comfortable with prices ending in:
$0.00, $0.25, $0.45, $0.49, $0.50, $0.75, $0.95, or $0.99.
• Whole dollars suggest luxury.
• Prices ending in “9” suggest a deal.
• Prices ending in “5” or “0” suggest good value but not
• In most cases, calculated prices are rounded up to
the nearest “comfortable” price.
Controlling Total Food Cost and Sales
• Tracking actual food cost as a percent of sales helps
a manager spot unexpected loss.
• Food cost for a month must account for more than just
food purchases:
― Food and beverage purchases are tracked separately
― Inventory in storage is valued by physical count at the start and
end of each period
Controlling Total Food Cost (cont.)
• Employee meals are valued and shifted to labor cost
as they are employee perks.
• Promotions (giving away food for marketing purposes)
is assigned to marketing, not food cost.
Transfers move ingredients from one department
to another. “Transfer in” adds to the food cost;
“transfer out” deducts the value from the food
• Transfers can occur between restaurants in a larger
hotel or campus or between a kitchen and bar
Controlling Total Food Cost (cont.)
Steward Sales are sales of ingredients from a
purveyor to an employee using the restaurant as a
middleman .
Grease Sales are monies raised by selling grease or
animal fat to another company.
Cost of Food Sold Formula
Preliminary Cost of Food Sold =
Opening Inventory + Purchases – Closing Inventory
Cost of Food Sold =
Preliminary Cost of Food
+ Transfers In
- Transfers Out
- Employee Meals
- Promotions and Write-Offs
- Steward Sales
- Grease Sales
Example 6f
A hotel restaurant has the following data.
What is the cost of food sold for this restaurant?
food purchases = $73,000
opening inventory = $41,000
closing inventory = $44,000
transfers in = $1,200
transfers out = $250
employee meals = $2,850
promotions and write-offs = $460
steward sales = $180
grease sales = $30
Example 6f (cont.)
Preliminary Cost of Food
=$41,000 + $73,000 - $44,000
= $70,000
Cost of Food Sold
= $70,000 + $1,200 - $250 - $2,850 - $460 - $180 - $30
= $67,430
Total Sales and Food Cost Percent
• Total Sales (food sales) = total money charged to
customers for the food they purchase.
―Beverages tracked separately
• Standard Food Cost Percent = budgeted FC% used to
determine menu prices
• Actual Food Cost Percent = actual FC% calculated
from cost of food sold and sales
• Often a variance between actual and stand FC%
because of menu price rounding, theft, waste,
spoilage, fluctuation in purveyor pricing, or guests
who leave without paying
FC-FC%-Sales Graphic Formula
FC% x Sales
FC% Variance
• Managers should try to keep actual and standard
FC% as close as possible
• High FC% translates to lower profit
Reasons and Solutions for FC% Variance
• requires greater security
• requires closer production oversight or additional employee
• requires purchasing adjustments
Purveyor price increase
• requires new purveyor, portion size change, or menu price
Gov’t regulations can have an impact, too
Below Budget FC%
• Below budget FC% is only good if it comes from better
pricing and efficiency.
• May signal reduction of quality or quantity standards.
• Reduced standards = fewer customers and less
• Variances are red flags that require investigation to
see if standards are being met, where the problem
lies, or if the variance is good news.
Controlling Revenue
Point of Sales (POS) Systems control revenue by
assigning all food ordered from the kitchen to a
guest and server.
• POS tracks which server is responsible for
uncollected monies.
• Only managers should be able to remove an item
from a guest check.
• Managers can require all cash to go through a
single cashier.
Controlling Revenue with a POS
• Computer-less businesses should use duplicate check
pads with one check going to the table and the
duplicate copy going to the kitchen.
• Managers can reconcile kitchen and cashier checks
to confirm they match and none are missing.
• Checks can be reviewed for addition errors too.

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