Menu Pricing Summary

3.1: OBJECTIVES

  • Understand the makeup of an income statement and interrelationships of costs affecting sales and profits.
  • Learn several important markup methods: factor method, markup on cost, gross markup, ratio method, TRA method.

3.2: UNDERSTANDING THE INCOME STATEMENT

  • Key to determining menu prices is understanding the income statement.
  • Sales: Total of selling price times quantity sold. Always 100% in the income statement.

Sales Breakdown Example:

  • Total Sales: $2,700,000
    • Food: 74.1% ($2,000,000)
    • Beverage: 25.9% ($700,000)

3.3: COST OF FOOD SOLD (FOOD COST)

  • Formula: Opening Inventory + Purchases - Closing Inventory = Cost of Food Sold.
  • Food cost percent = (Food Cost / Sales) x 100.

3.4: GROSS PROFIT

  • Formula: Gross Profit = Sales - Cost of Food Sold.
  • Gross Profit Percent = (Gross Profit / Sales) x 100.

4. LABOR EXPENSES

  • Includes total payroll, management salaries, and benefits; defined collectively as prime cost with food cost.
  • Labor Expense Percent = (Labor Expense / Sales) x 100.

5. OTHER CONTROLLABLE EXPENSES

  • Includes items like paper goods and cleaning supplies; can be managed by management.

6: NON-CONTROLLABLE EXPENSES

  • Fixed expenses like utilities, rent, and insurance.

7: TOTAL EXPENSES

  • Formula: Total Expenses = Labor + Other Controllable + Non-Controllable. Profit = Gross Profit - Total Expenses.

8: INCOME STATEMENT FORMULAS

  • COST OF FOOD SOLD = Opening Inventory + Purchases - Closing Inventory
  • GROSS PROFIT = Sales – Cost of Food Sold
  • TOTAL EXPENSES = Labor + Other Controllable + Non-Controllable
  • PRE-TAX PROFIT = Gross Profit – Total Expenses.

9: MARKUP METHODS

  • Many methods exist for determining selling prices based on cost and expenses.

9.1: THE NO-METHOD METHOD

  • Charging competitors’ prices often ignores individual restaurant dynamics.

9.2: THE FACTOR METHOD

  • Use predetermined food cost percent to calculate selling price using:
    ext{Cost Factor} = rac{100 ext{%}}{ ext{Desired Food Cost ext{%}}}
    ext{Selling Price} = ext{Cost Factor} imes ext{Item Cost}

9.3: THE MARKUP ON COST METHOD

  • ext{Selling Price} = rac{ ext{Meal Cost}}{ ext{Desired Food Cost ext{%}}}

9.4: THE GROSS MARKUP METHOD

  • Considers all expenses.
    ext{Meal Cost Per Customer} = rac{ ext{Gross Profit}}{ ext{No. of Customers}}
    ext{Selling Price} = ext{Meal Cost Per Customer} + ext{Meal Cost}

9.5: THE RATIO METHOD

  • Requires valid income statement. Ratio calculated from total expenses divided by food costs.

9.6: THE TRA METHOD

  • Texas Restaurant Association method; comprehensive cost approach.
    ext{Selling Price} = rac{ ext{Meal Cost}}{ ext{Sales ext{%}} - ext{Cost ext{%}}}

10: SELECTING A METHOD

  • TRA method is preferable due to its comprehensive nature. Accurate records are essential for effective pricing.

11: CONCLUSION

  • Pricing strategies are critical for financial success. Establishing an accurate menu price is essential to avoid undermining overall restaurant profitability.