CHAPTER 12 PRICING

PRODUCT CONTRIBUTION

MENU ENGINEERING BREAK-EVEN ANALYSIS

PRODUCT CONTRIBUTION

IDENTIFIES WHETHER YOUR MENU PRICES ARE HIGH ENOUGH TO ENSURE THAT THE AMOUNT REMAINING AFTER ALL VARIABLE COSTS HAVE BEEN SUBTRACTED IS SUFFICIENT TO COVER YOUR FIXED EXPENSES INCLUDING PROFIT.

PRODUCT CONTRIBUTION ANALYSIS ITEM ITEM COST OTHER COST PROD COST SELL PRICE % COST GROSS MAR COMM CONT $ CONT %

SMALL SODA 0.14 0.07 0.21 0.89 23.6% 0.68 0.11 0.57 64.4%MED SODA 0.18 0.07 0.99

LARGE SODA 0.28 0.07 0.35 1.09 32.1% 0.74 0.13 0.61 55.9%SMALL TEA 0.08 0.09 0.17 0.89 19.1% 0.72 0.11 0.61 68.9%

MED TEA 0.1 0.09 0.99LARGE TEA 0.16 0.09 0.25 1.09 22.9% 0.84 0.13 0.71 65.1%

SMALL COFFEE 0.08 0.11 0.19 0.55 34.5% 0.36 0.07 0.29 53.5%MED COFFEE 0.11 0.11 0.65

LARGE COFFEE 0.15 0.12 0.27 0.75 36.0% 0.48 0.09 0.39 52.0%

PRODUCT CONTRIBUTION ANALYSIS ITEM ITEM COST OTHER COST PROD COST SELL PRICE % COST GROSS MAR COMM CONT $ CONT %

SMALL SODA 0.14 0.07 0.21 0.89 23.6% 0.68 0.11 0.57 64.4%MED SODA 0.18 0.07 0.25 0.99 25.3% 0.74 0.12 0.62 62.7%

LARGE SODA 0.28 0.07 0.35 1.09 32.1% 0.74 0.13 0.61 55.9%SMALL TEA 0.08 0.09 0.17 0.89 19.1% 0.72 0.11 0.61 68.9%

MED TEA 0.1 0.09 0.19 0.99 19.2% 0.8 0.12 0.68 68.8%LARGE TEA 0.16 0.09 0.25 1.09 22.9% 0.84 0.13 0.71 65.1%

SMALL COFFEE 0.08 0.11 0.19 0.55 34.5% 0.36 0.07 0.29 53.5%MED COFFEE 0.11 0.11 0.22 0.65 33.8% 0.43 0.08 0.35 54.2%

LARGE COFFEE 0.15 0.12 0.27 0.75 36.0% 0.48 0.09 0.39 52.0%

PRODUCT CONTRIBUTION ANALYSIS PIZZA

INGREDIENTS COST SELLING PRODUCT GROSS COMM CONT. $ %PRICE COST MARGIN 12%

DOUGH 0.49SAUCE 0.13

CHEESE 0.84PEPPERONI 0.57

PLATE 0.68MORNAP 0.09

TOTAL COST 2.8 $10.00 28.0% $7.20 $1.20 $6.00 60.0%COST PORTION 0.35 $1.50 23.3% $1.15 $0.18 $0.97 64.7%

PRODUCT CONTRIBUTION ANALYSIS CHEESE STEAK

INGREDIENTS COST SELLING PRODUCT GROSS COMM CONT. $ %PRICE COST MARGIN 12%

MEAT 0.68CHEESE 0.18PEPPERS 0.08ONIONS 0.06

ROLL 0.12WRAP 0.06

TOTAL COST

PRODUCT CONTRIBUTION ANALYSIS CHEESE STEAKINGREDIENTS COST SELLING PRODUCT GROSS COMM CONT. $ %

PRICE COST MARGIN 12%MEAT 0.68

CHEESE 0.18PEPPERS 0.08ONIONS 0.06

ROLL 0.12WRAP 0.06

TOTAL COST 1.18 $3.29 35.9% $2.11 $0.39 $1.72 52.1%

MENU ENGINEERING MENU ENGINEERING IS A MARKETING

ORIENTED APPROACH TO EVALUATE CURRENT AND FUTURE MENU PRICING, DESIGN, AND MENU CONTENT USES SALES MIX AND PRICING MENU ENGINEERING IGNORES THE

QUESTION “WHAT IS A SATISFACTORY FOOD COST ?” AND ASKS INSTEAD “ARE WE GETTING A REASONABLE CONTRIBUTION TO PROFIT FROM THE SALES MIX?”

MENU ENGINEERING

THREE ELEMENTS CUSTOMER DEMAND MENU MIX CONTRIBUTION ANALYSIS

CLASSIFICATIONS

STARS PLOW HORSES PUZZLES DOGS

MENU ENGINEERING

STEP ONE FIND THE AVERAGE CONTRIBUTION MARGIN THE AVERAGE CONTRIBUTION

MARGIN IS CALCULATED BY DIVIDING THE TOTAL MENU CONTRIBUTION MARGIN BY THE NUMBER OF ITEMS SOLD

MENU ENGINEERING

LOOK AT EXAMPLE #1 THE AVERAGE CONTRIBUTION

MARGIN IS $ .59 CALCULATED AS FOLLOWS: $8100.23 DIVIDED BY 13,658

MENU ENGINEERING STEP 2 IS TO CLASSIFY THE MENU MIX AS

HIGH OR LOW. TO DO THIS USE THE FOLLOWING

FORMULA: (100/#OF ITEMS ON MENU] X 70% IN THIS EXAMPLE THERE ARE 22 MENU

ITEMS (100/22) X .7 = 3.2% ITEMS WHOSE MENU MIX IS GREATER THAN

3.2% ARE CLASSIFIED AS HIGH AND THOSE LESS THAN 3.2% ARE CLASSIFIED AS LOW

MENU ENGINEERING

QUADRANT ANALYSIS EACH MENU ITEM IS PLOTTED WITH

A QUADRANT OF A GRAPH ACCORDING TO THE FOLLOWING: MENU MIX CONTRIBUTION MARGIN

QUADRANT ANALYSIS

CONTRIBUTION MARGIN

MENU MIX %

PLOW HORSE

DOG

STAR

PUZZLE 10 20 30 40 50 60 70 80 90 100

2%

4%

6%

8%

10%

12%

14%

16%

• SMALL SODA

• OCEAN SPRAY

• LARGE SODA

• HOT COCO

• SM. COFFEE

• SM. TEA

BREAK EVEN SALES ANALYSIS

BREAK EVEN SALES ANALYSIS IS THE POINT IN SALES OR UNITS NEEDED TO SHOW NO LOSS OR PROFIT. INFORMATION NEEDED FIXED COST VARIABLE COST

FIXED AND VARIABLE COSTS FIXED COST VARIABLE COST

FOOD FOOD CHEMICALS CHEMICALS RENT

RENT

INSURANCE

INSURANCE

LABOR LABOR

COMMISSIONS

COMMISSIONS

• FIXED COST IS IN $$$

• VARIABLE COST IS IN %%%%

REMEMBER

BREAK EVEN SALES ANALYSIS

FORMULA FOR BEP IN SALES

TOTAL FIXED COST (100% - TOTAL VARIABLE COST)

DO PROBLEM #1

PROBLEM #1 DETERMINE BEP IN SALES

FOOD 39.9% LABOR $1,200 COMM 5% PAPER 4% CLEANING $10.00 TELEPHONE $2.00 OFFICE SUPPLIES $2.00 ADV & PRMO 3%

PROBLEM #1

FIXED COST LABOR $1,200 CLEANING $10 TELEPHONE $2 OFFICE $2 $1,214

•VARIABLE COST •COMM 5%

•PAPER 4%

•FOOD 39.9%

•ADV 3%

51.9%

$1,214.00 100% - 51.9%

= $2,523.91

PROBLEM #2 DETERMINE BEP IN SALES

FOOD 39.9% LABOR $1,200 COMM 5% PAPER 4% CLEANING $10.00 TELEPHONE $2.00 OFFICE SUPPLIES $2.00 ADV & PRMO 3% PROFIT OF 10%

PROBLEM #2

FIXED COST LABOR $1,200 CLEANING $10 TELEPHONE $2 OFFICE $2 $1,214

•VARIABLE COST •COMM 5%

•PAPER 4%

•FOOD 39.9%

•ADV 3%

•PROFIT 10%

61.9%

$1,214.00 100% - 61.9%

= $3,186.35

PROBLEM #3 DETERMINE BEP IN SALES

FOOD 39.9% LABOR $1,200 COMM 5% PAPER 4% CLEANING $10.00 TELEPHONE $2.00 OFFICE SUPPLIES $2.00 ADV & PRMO 3% PROFIT OF $500

PROBLEM #3 FIXED COST LABOR $1,200 CLEANING $10 TELEPHONE $2 OFFICE $2 PROFIT $500 $1,714

•VARIABLE COST •COMM 5%

•PAPER 4%

•FOOD 39.9%

•ADV 3%

51.9%

$1,714.00 100% - 51.9% = $3,563.41

GRAPH VIEW OF BEPA

FIXED COST

VARIABLE COST

TOTAL COST

SALES

. BEP

PROFIT