Food Cost and Menu Pricing Notes

  • Multiple approaches exist for menu pricing; all are valid.
  • The sales price for a dish must cover the item’s food cost and contribute to non-food costs.
  • Contribution Margin: The portion of a dish’s sales price remaining after covering the item’s cost per portion. It is key for profitability.

Calculating Menu Price Using Food Cost Percent

  • Formula: SP = FC ÷ FC\%, where:
    • SP = Selling Price
    • FC = Food Cost
    • FC% = Food Cost Percentage
  • Rearranged: SP \times FC\% = FC

Food Cost Percent Method

  • Food Cost: Cost per portion from the recipe spreadsheet.
  • Industry FC%: Ranges from 20-40%, with most operating in the low to mid-30s.
    • High-end restaurants aim for a lower food cost %.
    • Casual and fast-food restaurants often have a higher food cost %.

Price Example

  • Pot de Crème:
    • Ingredient Cost: $1.25
    • Desired Food Cost: 18%
    • Selling Price: 1.25 / 0.18 = $6.94
  • Roasted Turbot:
    • Ingredient Cost: $14.25
    • Desired Food Cost: 26%
    • Selling Price: 14.25 / 0.26 = $54.81

Factor Pricing Method (Markup)

  • The percentage that food cost represents from each revenue dollar.
  • Converts food cost % into a pricing factor to determine the menu price.
  • Steps:
    1. Determine the Factor: Divide 1 by the desired Food Cost %.
      • Example: Desired FC% is 25%, so the Factor is 1 / 0.25 = 4
    2. Multiply the cost of food by the factor.
      • Example: Cost of oyster is $1.50, so the Selling Price is 1.50 \times 4 = $6.00

Overhead-Contribution Method

  • CM%: Contribution Margin %
  • Formula:
    • CM\% = (Overhead + Profit) / Sales
    • FC\% = 100\% - CM\%, where CM is in % form
    • SP = FC / FC\%, where FC% is in decimal form
  • Uses budgets and historical data to determine overhead, profit costs, and FC%.
  • A restaurant has:
    • Overhead: $710,000
    • Desired Profit: $47,000
    • Forecast Sales: $1,000,000
  • Determine FC% and sales price for grouper with a cost per portion of $5.28.

Overhead-Contribution Method - Calculation

  • CM\% = ($710,000 + $47,000) / $1,000,000 = 75.7\%
  • FC\% = 100\% - 75.7\% = 24.3\%
  • Sales price for grouper:
    • SP = $5.28 / 0.243 = $21.73
  • Primary benefit of this method: Incorporates all costs and profit goals into pricing.

Texas Restaurant Association (TRA) Method

  • Similar to the overhead-contribution method but allows profit percent (and FC%) to vary by menu category or item.
  • Formula: FC\% = 100\% - Overhead\% - Profit\%
  • Strategy:
    • Low-profit entrées can be balanced with high-profit categories.
    • Higher profit margins on slow-moving items.
    • SP = FC / FC\%, same calculation to previous methods.

Calculating Menu Prices Using Prime Costs

  • Prime Cost Definitions:
    • Combined total cost of food, beverage, and labor cost (overall perspective).
    • Combined total cost per portion and direct labor cost needed to prepare a dish (single-portion perspective).
  • Direct Labor Cost: Determined by observing staff productivity and factoring in employee hourly wage rates.

Prime Cost Method

  • Prime Cost = Food Cost + Direct Labor Cost
  • Sales Price = Prime Cost \times Price Factor
  • The price factor starts randomly but is refined with historical data.
  • 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 Method - Calculation

  • Prime Cost = $1.92 + $1.65 = $3.57
  • Sales Price = $3.57 \times 3.1 = $11.07

Actual Pricing Method

  • Price Divisor = 100\% - (Variable Cost\% + Fixed Cost\% + Profit\%)
  • Sales Price = Prime Cost / Price Divisor
  • Uses budget percents to determine a price divisor to apply to a dish’s prime cost.
  • Variable cost is 29%, fixed cost is 12%, and profit is 6%. Calculate sales price for a dish costing $3.09 per portion with a direct labor cost of $0.88.

Actual Pricing Method - Example

  • 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 per customer = Gross profit over a period / Customers over that period
  • Sales Price = Cost per portion + Gross profit per customer
  • Gross profit is money made from sales after food and beverage costs are deducted (like contribution margin, but it refers to total sales over a period of time).
  • Restaurant has gross profit of $2,890.00 and serves 1,000 customers monthly. A sandwich costs $1.47 per portion. Determine a sales price for the sandwich.

Gross Profit Pricing Method - Example

  • Gross profit per customer = $2,890.00 / 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 cost – like in 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

  • Starts with sales price and works backward to create a target food cost per portion. Often used in corporate cafeterias and fast food.
  • Steps:
    1. Determine desired SP
    2. FC = SP \times FC\%
    3. Modify recipe to hit FC target

Matching Competitors’ Prices

  • Keeps sales prices competitive, but is a risky strategy because you don’t know the competitors’ costs and special arrangements.
  • Considerations:
    • Family businesses may use free labor from family members.
    • Large operations may get cheap purveyor prices for buying in bulk.
    • Selling at their prices may not be affordable.