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CATERING MENU PRICING AND
CONTROLS
CM226 Catering and Event Management
Chapter 7, pages 156 – 184
CHAPTER OBJECTIVES1.Explain the requirements of effective
and accurate menu pricing.
2. Discuss the formulas for calculating costs, breakeven points, and profits.
3. Explain revenue management practices.
1. COST AND PROFIT.The four major categories of cost:
Food and beverage costs: The cost of all food-related purchases required to produce completed menu items.
Labor costs: The costs associated with labor, including benefits, taxes, wages, meals, and uniforms.
Overhead costs: The costs of operating the business.
To these three costs can be added profit:
Profit: funds remaining after all costs have been paid from revenues.
BREAK EVEN ANALYSIS
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WHAT IS BREAK EVEN? The amount of sales, costs and price at which there
is neither a loss nor a gain in business.
Another way to put it is:
Break-Even is the volume where all fixed expenses are covered.
The key to Break Even is PRICE. You must ask the question…
At what price will I break even? Make a profit?
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WHY IS BREAK EVEN IMPORTANT?
“Rita”, a graduate, has a business making pillows, bed coverings and linens.
A famous business woman became interested in the products and, over time, they struck up a deal to sell pillows in a famous catalog.
Rita sold the pillows for $60 to this famous person’s business.
However, after doing Break Even with the help, Rita discovered it cost her $54 to manufacture each pillow.
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WHY IS BREAK EVEN IMPORTANT?
Rita’s gross profit was $6.00 or 10% of the selling price.
10% of the selling price will go to paying for overhead or indirect costs or Fixed Cost.
Since she did not perform a Break Even Analysis, Rita was surprised to see that she was actually losing money.
Offering the pillows at the low $60 price, Rita is only covering her direct cost and barely covering her indirect cost.
KEY TERMS USED IN BREAK-EVEN ANALYSIS:
Fixed Cost
Variable Unit Cost
Unite Price
Expected Unit Sales
Unit Price
Total Variable Costs
Total Costs
Total Revenue
Profit (or Loss)
Break-Even
KEY TERMS Fixed Cost:
The sum of all costs required to produce the first unit of a product. This amount does not vary as production increases or decreases, until new capital expenditures are needed.
Variable Unit Cost:Costs that vary directly with the production of one additional unit.
FIXED COSTS Are those costs that remain constant
regardless of the volume of business.
The costs you must cover whether you make a sale or not.
Examples include:RentInsuranceDebt Service on Equipment
VARIABLE COSTS Are those costs associated with the
volume of business and are flexible.
Examples include:Labor (mixed as it is both fixed and
variable)LinenPaper GoodsFood product
TOTAL COSTS Together, the Fixed cost plus the
Variable Costs equal TOTAL Costs.
Expected Unit Sales:Number of units of the product projected to be sold over a specific period of time.
Unit Price:The amount of money charged to the customer for each unit of a product or service.
KEY TERMS (CONTINUED)
Total Variable Cost:The product of expected unit sales and variable unit cost. (Expected Unit Sales * Variable Unit Cost)
Total Cost:The sum of the fixed cost and total variable cost for any given level of production. (Fixed Cost + Total Variable Cost)
KEY TERMS (CONTINUED)
Total Revenue:The product of expected unit sales and unit price. Expected Unit Sales * Unit Price
Profit (or Loss):The monetary gain (or loss) resulting from revenues after subtracting all associated costs. Total Revenue - Total Costs
KEY TERMS (CONTINUED)
Break Even:Number of units that must be sold in order to produce a profit of zero (but will recover all associated costs).
Break Even = FC / (Unit Price – VC per Unit
KEY TERMS (CONTINUED)
2. BREAKEVEN ANALYSIS A method of identifying how much
revenue must be generated before an operation begins to make a profit.
COST/VOLUME/PROFIT ANALYSIS Each foodservice operator knows that
some accounting periods are more profitable than others.
A Cost/Volume/Profit Analysis can help managers predict and plan for profitability.
At the Break-Even point, operational expenses are exactly equal to sales revenue.
Losses
COST/VOLUME/PROFIT ANALYSIS
Cost/Volume/Profit Graph
Profits Total Costs
Total Revenues
Break-Even point
Dollars
Number of Covers x axis
y axis
0
WHY IT IS IMPORTANT TO UNDERSTAND YOUR BREAK-EVEN POINT?
Breakeven analysis gives you insight to the effects of important business decisions like:
Will it be profitable to market a product or service?
What prices will you need to charge for your product or service?
How many units should you produce?
WHY IT IS IMPORTANT TO UNDERSTAND YOUR BREAK-EVEN POINT?
What is the financial attractiveness of different strategic options for your business, such as expanding operations or hiring new employees?
How can you do a better job of handling cash flow evenly?
Break-Even analysis is a tool to calculate at which sales volume the variable and fixed costs of producing your product will be recovered.
Another way to look at it is that the Break-Even point is the point at which your product stops costing you money to produce and sell, and starts to generate a profit for your company.
WHY IT IS IMPORTANT TO UNDERSTAND YOUR BREAK-EVEN POINT?
You can also use Break-Even analysis to solve managerial problems:
setting price levels
targeting optimal variable/ fixed cost combinations
determining the financial attractiveness of different strategic options for your company
WHY IT IS IMPORTANT TO UNDERSTAND YOUR BREAK-EVEN POINT?
BREAK-EVEN ANALYSIS DEPENDS ON THE FOLLOWING VARIABLES:
The fixed production costs for a product.
The variable production costs for a product.
The product's unit price.
The product's expected unit sales [sometimes called projected sales.]
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WHAT IS BREAK EVEN? The amount of sales, costs and price at
which there is neither a loss nor a gain in business.
Another way to put it is:
Break-Even is the volume where all fixed expenses are covered.
The key to Break Even is PRICE. You must ask the question…
At what price will I break even? Make a profit?
YOU CAN ALSO USE BREAK EVEN ANALYSIS TO SOLVE MANAGERIAL PROBLEMS:
setting price levels
targeting optimal variable/ fixed cost combinations
determining the financial attractiveness of different strategic options for your company
The Break-Even point is the point where
Total Contribution = Total Fixed Cost
At THIS point,
There is no profit, and There is no loss
DEVELOPMENT OF A BREAK-EVEN GRAPH The following graphs illustrate how one
builds a Break-Even chart.
This company has annual fixed costs of $40, a unit selling price of $10, and a unit variable cost of $6. Since it earns $4 from each unit that it sells for $10, the company has a margin percentage of 40% of sales
FIXED COSTS
First, one draws the fixed cost line on a graph. A flat line at the $40 level represents fixed costs.
Next we show the variable cost line in this graph.
VARIABLE COSTS
VARIABLE COSTS
Adding the variable costs to the fixed costs provides the total costs.
In Break-Even and cost-volume-profit analysis accountants assume all costs are either fixed or variable.
REVENUE LINE
This line enables one to identify the Break-Even point, the point at which the total revenue line crosses the total cost line.
PROFIT GRAPHS
Because the Break-Even chart has so many lines it can be confusing to read.
Accordingly, accountants have developed the Profit Graph to show the same information but with fewer lines.
The profit graph below shows the same information as the Break-Even chart.
PROFIT GRAPHS (CONTINUED)
2. BREAKEVEN ANALYSIS The breakeven point: the point at
which revenue has covered costs and can become profit.
Calculated by dividing the contribution rate into the total of fixed costs.
3. MENU PRICING Fixed price, or table d’hote
Caterers traditionally rely on fixed price menus to control costs, production, service, and profit.
Requires that operators consider how to establish a selling price and still maintain a profitable overall food cost percentage.
3. MENU PRICING Individual menu items can be
changed without affecting the food cost percentage and selling price.
Mixed pricing, or semi a la carte
The customer is offered a set price menu with the option of changing some courses for an additional charge per person.
3. MENU PRICING Individual course pricing, or a la carte
Offers every course item on the menu for a separate per-person price.
Requires guidance from the catering sales staff to help guests develop menus whose combinations of food items are appropriate as well as work-able from the standpoint of production.
4. PRICE RANGE. Catering menus should be established
within a range of no more than $12 to $15.
By providing a limited price range, customers can be comfortable about their decision without feeling either extravagant or cheap.
5. CATERING PRICING METHODS. Actual cost method
Applied where the selling price is established before the cost of food is calculated.
Determines the percentage that each of the four price components represents based on costs currently incurred by the foodservice business and an established profit percentage goal.
5. CATERING PRICING METHODS. Food cost percentage method
Method used most frequently in restaurant operations to price individual menu items.
Determines what the selling price should be based on a known food cost percentage.
5. CATERING PRICING METHODS. Two of the following three factors
must be known in order to apply the food cost percentage to menu pricing:
Food cost PercentageCost of Food (COGS F)Selling Price
The food cost percentage method consists of three pricing formulas, one for determining each unknown factor.
The Formulas and their Abbreviations are as follows:
1.) food cost / food-cost % = Selling Price
FC / FC% = SP
2.) food cost / selling price = food-cost %FC / SP = FC%
3.) selling price x food-cost % = food costSP x FC% = FC
5. CATERING PRICING METHODS. Factor pricing
Establishes a factor that represents the food cost percentage.
Explain the factor pricing formula.
FACTOR PRICING The Factor Pricing method establishes
a factor that represents the food-cost percentage.
The factor is based on the number of times the percentage can be divided into 100:
100% / 40% = 2.5
FACTOR METHOD This factor is multiplied by the food cost
to calculate the selling price:
$3.35 (food cost) x 2.5 (factor) = $8.37
Management can apply the factors for the food-cost percentages most commonly used in their operation to quickly calculate selling prices.
Food cost percentage method
Method used most frequently in restaurant operations to price individual menu items.
Determines what the selling price should be based on a known food cost percentage.
5. CATERING PRICING METHODS.
6. MAINTAINING FOOD COST PERCENTAGES.
The foodservice industry at the beginning of the twenty-first century is highly competitive.
Shrinking profit margins require managers to be constantly aware of the percentage cost represents of the selling price.
The foodservice industry at the beginning of the twenty-first century is highly competitive.
6. MAINTAINING FOOD COST PERCENTAGES.
Shrinking profit margins require managers to be constantly aware of the percentage cost represents of the selling price.
Developing selling prices for catering menus that accurately meet the needs of both caterer and customer requires a thorough analysis of both the business and the customer profile.
6. MAINTAINING FOOD COST PERCENTAGES.
Management recognition of the value perceived for menus is critical to the maintenance of a successful menu-pricing program.
The sales mix is a means of ranking menu items according to their contribution to the overall volume of sales.
6. MAINTAINING FOOD COST PERCENTAGES.
It is also necessary to assess the contribution each menu item makes to overall profit in order to ensure that the menu price is actually generating the desired profit margin.
The contribution to profit method is based on selecting menu prices according to what the customer pays for an item and the contribution that the sales of the menu item make to the gross profit of the operation.
6. MAINTAINING FOOD COST PERCENTAGES.
The differential between the menu price of an item and its food cost is called the contribution to gross profit.
Gross profit refers to all monies left after the food cost is deducted from the selling price.
7. PACKAGE PRICING. Package prices can combine
reception, dinner, beverage, flowers, entertainment, and theme costs as one per-person price.
The function package most common to catering services is the wedding reception.
KEY POINTS Menu pricing is important to the
ongoing success of every catering operation and service.
Catering menu prices are calculated based on the amount of revenue needed to cover the four pricing components: overhead cost, labor cost, food cost, and profit.
KEY POINTS The four pricing methods most
adaptable to catering menus are the actual cost method, the food cost percentage method, the factor pricing method, and the contribution to profit method.
Maintaining successful pricing requires daily and weekly monitoring of food costs to ensure desired food cost percentages and profit margins.
KEY POINTS Control systems such as food cost
reviews, the sales mix, and contribution to profit analysis are used to achieve successful menu prices.
