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: $2,700,000Food: 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. 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:e x t S e l l i n g P r i c e = e x t C o s t F a c t o r i m e s e x t I t e m C o s t ext{Selling Price} = ext{Cost Factor} imes ext{Item Cost} e x t S e l l in g P r i ce = e x t C os tF a c t or im ese x t I t e m C os t 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.e x t M e a l C o s t P e r C u s t o m e r = e x t G r o s s P r o f i t e x t N o . o f C u s t o m e r s ext{Meal Cost Per Customer} = \frac{ ext{Gross Profit}}{ ext{No. of Customers}} e x t M e a l C os tP er C u s t o m er = e x t N o . o f C u s t o m er s e x t G r oss P r o f i t e x t S e l l i n g P r i c e = e x t M e a l C o s t P e r C u s t o m e r + e x t M e a l C o s t ext{Selling Price} = ext{Meal Cost Per Customer} + ext{Meal Cost} e x t S e l l in g P r i ce = e x t M e a l C os tP er C u s t o m er + e x t M e a l C os t 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. 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. Knowt Play Call Kai