Restaurant Costing and Pricing Principles [Lecture]

Overview of Restaurant Costing

  • Discussion revolves around pricing meals and understanding food costs in restaurants.

Basic Food Cost Calculation

  • Example with a burrito:

    • Burrito cost: $3

    • Chips cost: $0.30

    • Salsa cost: $0.20

  • Q factor calculation:

    • Chips + Salsa = $0.30 + $0.20 = $0.50

  • Total cost of the recipe including Q factor: $3.00 + $0.50 = $3.50

Application of Q Factor in Different Contexts

  • Importance is stressed on applying Q factor:

    • Only applies to entrees, e.g., burritos in a burrito restaurant or steaks in a steakhouse.

    • Exclusions:

    • Bread and butter at steakhouse is not included in appetizer pricing, as not everyone orders them.

  • Menu category specificity is emphasized; it’s not about specific items but categories like entrees or appetizers.

Examples at a Steakhouse

  • Starter items:

    • Bread: $0.25

    • Butter: $0.10

    • Soup: $1.05

    • Salad: $2.00

  • Q factor calculation for steakhouse:

    • Q factor includes bread and butter: $0.25 + $0.10 = $0.35

  • Only the most expensive side is chosen when calculating Q factor for soup and salad.

Understanding Choice Decisions

  • Critical importance of understanding the menu’s complexity, such as bars offering snacks and drinks:

    • Snacks included in drink pricing if no food is served.

Significance of Proper Costing

  • Understanding menu item costing helps in:

    • Proper purchasing decisions

    • Accurately pricing menu items based on food cost percentages.

Pricing Formula Methodology

  • Traditional formula discussed for determining sales price from cost:

    • Formula: Sales Price = Cost / Food Cost Percentage

    • Initial skepticism about the completeness of this method acknowledged.

Contribution to Restaurant Profitability

  • Discussion of average restaurant models based on contribution margins:

    • Contribution margin definition:

    • Sales - Cost of Goods Sold (COGS)

    • Example: If $500,000 worth of food sold with COGS of $200,000, then Contribution Margin = $300,000.

  • Importance of pricing in relation to the average food cost percentage in restaurants (20% to 40% typical range).

Real World Scenarios of Costing

  • Comparing high-end restaurant prices (e.g., Eleven Madison Park) to casual dining (e.g., In-N-Out):

    • Importance of high-quality ingredients, labor intensity, and the overall dining atmosphere in determining prices.

    • How costs breakdown reflects on the dining experience, sales volume, and pricing strategy:

    • High-end dining incurs higher overheads, thus requiring a lower food cost percentage.

Overhead Analysis

  • Discussion on how overhead is determined and its uncertainty for new restaurants:

    • Suggestion to base estimates on historical data, utilizing research for budgeting.

Practical Application to Food Costing

  • Prioritizing overhead with sales examples:

    • For $1,000,000 in sales with an overhead of $650,000 and desired profit of $50,000:

    • Total needed contribution margin = $700,000.

    • Contribution Margin Percentage: $700,000 / $1,000,000 = 70%.

    • Therefore, 100% - 70% = 30% food cost.

Conclusion and Application in Business Scenarios

  • The relationship between sales pricing and production costs emphasized:

    • Reverse engineering from desired profit allows for better understanding of optimal food cost percentages.

  • Encouragement to ascertain actual pricing based on real insights before confirming business strategies.