COST-VOLUME-PROFIT RELATIONSHIPS

Variable Costs, Variable RatesFixed Costs, ProfitContribution Margin/RateBreak Even PointDetermining Selling Price & Product MixApplying Formulas

COST-VOLUME-PROFIT RELATIONSHIPS

 Variable Costs—Costs that vary with Volume

COGLabor—Hourly Wages and BenefitsSupplies—Cleaning, Napkins, etc.

Contribution Margin—Fixed costs and Profit generated by sales

Sales=SFixed Costs=FCVariable Costs=VCProfit=P

FORMULAS:

S=VC+(FC+P)

S=VC+CM

VC=S-CM

VC=S-(FC+P)

CM=S-VC

FC+P=S-VC

Using the Formulas

-To create the Operating Budget or to Forecast -Profitability Analysis -Calculate Breakeven (0 profit position) -Determine how much can be spend on variables if

management has predetermined the fixed costs and desired profit.

Variable Rate (VR)=VC/Total Sales

-The % of sales used to pay for variable costs (i.e.

food and beverage costs and variable labor)

Contribution Rate (CR)=CM/Total Sales -The % of sales available to pay for fixed costs and

profit

Break Even Point

The point at which you will pay all expenses, but generate no profit

BE=$FC/%CR Break Even=Fixed Costs/Contribution Rate

FORMULAS

$VC / S = VR(%)

$CM/ S = CR(%)

VR + CR = 1

S = FC + P / CR

SALES FORECASTINGSALES = FIXED COST + PROFIT / CONTRIBUTION MARGINUNIT SALES = FC + PROFIT/AVG. CHECK – AVERAGE VC

.SALES IN UNITS AVG. CHECK AVG. VC FIXED COST PROFIT

$14.00 $4.00 $1,000.00 $0.00

$19.00 $4.00 $1,800.00 $0.00

$11.00 $3.00 $6,000.00 $3,000.00

$17.00 $6.00 $18,000.00 $0.00

$16.00 $8.00 $23,000.00 $0.00

$14.00 $7.00 $29,000.00 $1,000.00

$14.00 $6.00 $168,000.00 $0.00

$14.00 $3.00 $293,000.00 $0.00

CONTRIBUTION MARGIN & RATE

.

SALES $1,800VARIABLE COSTS 800FIXED COSTS 500PROFIT 500

WHAT IS THE CONTRIBUTION MARGIN?WHAT IS THE CONTRIBUTION RATE (%)?IF FIXED COSTS INCREASED TO $800, WHAT IS THE NEW CM AND CR?IS ALES INCREASED TO $2,400, WHAT IS THE NEW CM AND CR?

SALES FORECASTING

. SALES VC VR FC PROFIT CM CR

$5,000 $3,000 $2,000

$15,000 $10,000

$8,000 $1,000 68%

$15,000 $6,000 61%

$5,000 $3,000 $2.00

PURCHASING, RECEIVING, STORAGE & ISSUING• PURCHASING

– TERMINOLOGY– STANDARDS– FORMS – METHODS– FORMULAS

• RECEIVING-TERMINOLOGY-STANDARDS & TECHNIQUES

• STORAGE PRINCIPLES– DIRECTS vs. STORES– ISSUING PRACTICES– INVENTORY VALUATION– AVG. INVENTORY & INVENTORY TURNOVER

PURCHASING

Purchasing Standards are dictated by the Target Audience

-Who is the clientele?-What concept have you developed to appeal to this audience?-What will their expectations be?

Three areas of standards development:

QualityQuantityCost

QUALITY

Product specifications:Intended UseProduct NameBrand NameGradeColorSize of ProductSize of PackageMinimum WeightRequired YieldPlace of OriginRipeness

Purchase Specification—All specs relating to the purchase and receiving of the product

Credit TermsDelivery ScheduleSupplierAvailabilityIntended UseProduct NameBrand NameGrade

ColorSize of ProductSize of PackageMinimum WeightRequired YieldPlace of OriginRipeness

ORDERING Par Stock (Par Level)—the point at which an item should be ordered Periodic Ordering—when routes are set and merchandise is only

delivered on that schedule

Amount Required for the Period+Safety stock-Amount on HandAmount to be Ordered (adjusted to case size

This is standard in most small restaurants where minimum orders are a

consideration, and with larger organizations what use One-Stop-Shopping and keep ordering to a minimum to reduce costs.

PERPETUAL ORDERING

-Fluctuating order dates-Product ordered whenever the level falls below par-Orders cover what will be used until delivery and another

order can be placed

Maximum Storage Amt.-Ordering Point+Amount needed before delivery receivedAmount Needed+Safety Stock (% of Order or Specific CountAmount to Order

PERIODIC ORDERING

• . AMT. USE BEFOREPRODUCT NEEDED O/H SAFETY% DELIVERY ORDER

PASTA 300# 30 10% 10

TOMATOES 6 CS. 6 0 20

RIB EYE 200# 200 10% 20

ICE CREAM 20 GAL. 20 0 1

SALMON 60 PCS. 30 5% 0

Inventory

Bin Cards are used to record inventory levels as merchandise is received and issued.

Physical Inventory serves as a check of the

perpetual inventory system.

Physical inventory should be done AT LEAST once a month.

BUYING METHODS

Open bid—Stewards Market Quotation SheetCall for bidsCan be shown to other vendors and used as leverage

Sealed bids—bids are submitted sealed and cannot be used against each other.Can be re-bid after the first roundUsed more for equipment and furniture than for food

Cost Plus—the vendor guarantees to deliver the product at their cost plus a certain

percentage profit—used frequently for produceTies you into one vendorWho determines the price?

Generally used in high volume situations as a negotiating tool to get lower prices

Co-op Buying—small operations join together--volume discounts--buy in bulk and

redistribute

PurchasingOne-Stop-Shopping—single vendors handle a large volume of the product needed.

Meat and product may fall outside the contractU.S. Foodservice and Sysco are the major One-Stop vendors

Contracts—are frequently written for perishables and are guaranteed for a certain period of time

Ties in prices, which may then rise or drop on the active market Warehouse Buying—large warehouses; a full line of product: buyers shop supermarket style

Jetro, Restaurant Depot Standing Orders—vendors maintain stock and take returns on unused/old product

Bread, dairy Centralized Purchasing--main office sets standards; local branches purchase

No local customization for regional preferences On-Line Purchasing—specifications are sent out via web site and anyone can submit bid

Purchase Pro

HOW MUCH PRODUCT IS NEEDED?

EP = Edible PortionAP = As Purchased%Yield = ED/AP $EP = $AP x %Yield AP = EP/%Yield

%Yield are available from several sources

-on-line product identification web sites-vendors-purchasing manuals-hands on analysis

EP / AP = YIELDAP x YIELD = EPEP / YIELD = AP

• .

EP COST AP COST YIELD

$12.00 50%

$128.00 75%

$22.50 68%

$8.00 $16.00

$100.00 70%

$228.00 70%

RECEIVING, STORAGE AND ISSUING

The Receiving Department is responsible for

maintaining the standards set by management. They must have copies of all standards set

Quality—Product SpecificationsQuantity—Purchase OrdersCost—Purchase Orders

RECEIVING, STORAGE AND ISSUINGMust Haves:

Scales—weight all meats and product Thermometer—make sure food is delivered at appropriate temperatures Calculator—make sure to delete anything that is missing and subtract from

total Knife—if ripeness standards are set, cut fruit to verify Receiving Sheet—sent to Accounts Payable with all Invoices received for the

day

RECEIVING, STORAGE AND ISSUINGFIFO—First In First Out

Date all incoming inventoryRotate stockMaintain product quality through appropriate storage; temperature, humidity

Product Temperature %Humidity Beef 34-38Poultry 28-32Fish 32-36Live Shellfish 30-40Eggs 40-45Dairy 35-41Fruit and Vegetables 34-50 85-95Freezer 0Dry Storage 70 70

RECEIVING, STORAGE AND ISSUING

Protect inventory from theft and pilferage--System of checks and balances

Requisition FormsLimit access to storage areasHire people with history of integrity Locate storage areas in easy to secure locations

Directs—products delivered straight to their place of use; immediately

charged to the department ordering them Stores—products delivered to a warehouse area until needed; charged to

the appropriate department when requisitioned

INVENTORY VALUATION

Physical Inventory should be done AT LEAST once a month.

Inventory high volume items more frequentlyHigh cost items may be inventoried every day

Five common types of inventory valuation:

FIFO, LIFO, Weighted Avg., Actual, Last Price

1. FIFO—Closing inventory is calculated using the most recent prices

Orders:1/1 5 cases at $4 each1/15 4 cases at $5 each1/20 4 cases at $3 each1/29 5 cases at $4 each

Closing Inventory: 8 casesInventory: 5 cases at $4=$20

3 cases at $3=$9Total Value: $29.00

2. LIFO—Closing inventory is priced using the earliest prices

Closing Inventory: 8 casesInventory: 5 cases at $4=$20

3 cases at $5=$15Total Value: $35.00

Orders:1/1 5 cases at $4 each1/15 4 cases at $5 each1/20 4 cases at $3 each1/29 5 cases at $4 each

Inventory Valuation3. Weighted Average

Weighted Average=Total Costs/Total Units

Orders:1/1 5 cases at $4 each $201/15 4 cases at $5 each $201/20 4 cases at $3 each $121/29 5 cases at $4 each $20

Cases 18 $Total $72Weighted Avg. $4Closing Inventory= 8 cases $32

4. Actual Price Method--Each item is marked as it is stored; rarely used

5. Last Price Method--inventory is priced using the last recorded price Most accurate because it reflects “replacement cost”

8 cases @ $4 = $32

INVENTORY TURNOVER

Inventory turnover varies by style of restaurant:

Full service 20-25/yr.Fast Food 150+/yr.Liquor 7-12/yr.

Excessively high turnover—Shortages

Customer dissatisfaction Extremely low turnover—Spoilage

Pilferage Costs--estimated @ 15% of inventory. Opportunity Costs

Inventory Turnover = COGS/Average Inventory

COGS=O I + P – CI Average Inventory=OI +C I

2

AVERAGE INVENTORY & TURNOVER

• .

OI CI PUR. AI IT

12,000 12,000 15,00016,500 17,000 31,00022,000 23,000 45,0006,000 5,000 18,00012,380 6,380 23,00031,000 31,200 103,00015,000 14,000 93,000

AVG. INVENTORY = OI + CL /2INVENTORY TURNOVER = $COG / AI$COG = OI + PURCHASES - CI