Catering Menu Pricing and Controls

1. Catering Menu Pricing and Controls CM226 Catering and Event Management Chapter 7, pages 156 – 184

2. CHAPTER OBJECTIVES • Explain the requirements of effective and accurate menu pricing. • 2. Discuss the formulas for calculating costs, breakeven points, and profits. • 3. Explain revenue management practices.

3. 1. Cost and Profit. The four major categories of cost: • Food and beverage costs: The cost of all food-related purchases required to produce completed menu items. • Labor costs: The costs associated with labor, including benefits, taxes, wages, meals, and uniforms.

4. Overhead costs: The costs of operating the business. To these three costs can be added profit: • Profit: funds remaining after all costs have been paid from revenues.

5. Break Even Analysis

6. What is break even? • The amount of sales, costs and price at which there is neither a loss nor a gain in business. Another way to put it is: Break-Even is the volume where all fixed expenses are covered. • The key to Break Even is PRICE. You must ask the question…At what price will I break even? Make a profit?

7. Why is Break Even Important? • “Rita”, a graduate, has a business making pillows, bed coverings and linens. • A famous business woman became interested in the products and, over time, they struck up a deal to sell pillows in a famous catalog. • Rita sold the pillows for $60 to this famous person’s business. • However, after doing Break Even with the help, Rita discovered it cost her $54 to manufacture each pillow.

8. Why is Break Even Important? • Rita’s gross profit was $6.00 or 10% of the selling price. • 10% of the selling price will go to paying for overhead or indirect costs or Fixed Cost. • Since she did not perform a Break Even Analysis, Rita was surprised to see that she was actually losing money. • Offering the pillows at the low $60 price, Rita is only covering her direct cost and barely covering her indirect cost.

9. Key Terms used in Break-Even Analysis: • Fixed Cost • Variable Unit Cost • Unite Price • Expected Unit Sales • Unit Price • Total Variable Costs • Total Costs • Total Revenue • Profit (or Loss) • Break-Even

10. Key Terms • Fixed Cost:The sum of all costs required to produce the first unit of a product. This amount does not vary as production increases or decreases, until new capital expenditures are needed. • Variable Unit Cost:Costs that vary directly with the production of one additional unit.

11. Fixed Costs • Are those costs that remain constant regardless of the volume of business. • The costs you must cover whether you make a sale or not. • Examples include: • Rent • Insurance • Debt Service on Equipment

12. Variable costs • Are those costs associated with the volume of business and are flexible. • Examples include: • Labor (mixed as it is both fixed and variable) • Linen • Paper Goods • Food product

13. Total Costs • Together, the Fixed cost plus the Variable Costs equal TOTAL Costs.

14. Key Terms (continued) • Expected Unit Sales:Number of units of the product projected to be sold over a specific period of time. • Unit Price:The amount of money charged to the customer for each unit of a product or service.

15. Key Terms (continued) • Total Variable Cost:The product of expected unit sales and variable unit cost. • (Expected Unit Sales * Variable Unit Cost) • Total Cost:The sum of the fixed cost and total variable cost for any given level of production. • (Fixed Cost + Total Variable Cost)

16. Key Terms (continued) • Total Revenue:The product of expected unit sales and unit price. • Expected Unit Sales * Unit Price • Profit (or Loss):The monetary gain (or loss) resulting from revenues after subtracting all associated costs. • Total Revenue - Total Costs

17. Key Terms (continued) • Break Even:Number of units that must be sold in order to produce a profit of zero (but will recover all associated costs). • Break Even = FC / (Unit Price –VC per Unit

18. 2. Breakeven Analysis • A method of identifying how much revenue must be generated before an operation begins to make a profit.

19. Cost/Volume/Profit Analysis • Each foodservice operator knows that some accounting periods are more profitable than others. • A Cost/Volume/Profit Analysis can help managers predict and plan for profitability. • At the Break-Even point, operational expenses are exactly equal to sales revenue.

20. Cost/Volume/Profit Analysis Cost/Volume/Profit Graph y axis Total Revenues Profits Total Costs Dollars Losses Break-Even point 0 Number of Covers x axis

21. Why it is important to understand your Break-Even point? • Breakeven analysis gives you insight to the effects of important business decisions like: • Will it be profitable to market a product or service? • What prices will you need to charge for your product or service? • How many units should you produce?

22. Why it is important to understand your Break-Even point? • What is the financial attractiveness of different strategic options for your business, such as expanding operations or hiring new employees? • How can you do a better job of handling cash flow evenly?

23. Why it is important to understand your Break-Even point? • Break-Even analysis is a tool to calculate at which sales volume the variable and fixed costs of producing your product will be recovered. • Another way to look at it is that the Break-Even point is the point at which your product stops costing you money to produce and sell, and starts to generate a profit for your company.

24. Why it is important to understand your Break-Even point? • You can also use Break-Even analysis to solve managerial problems: •  setting price levels •  targeting optimal variable/ fixed cost combinations •  determining the financial attractiveness of different strategic options for your company

25. Break-Even analysis depends on the following variables: • The fixed production costs for a product. • The variable production costs for a product. • The product's unit price. • The product's expected unit sales [sometimes called projected sales.]

26. What is break even? • The amount of sales, costs and price at which there is neither a loss nor a gain in business. Another way to put it is: Break-Even is the volume where all fixed expenses are covered. • The key to Break Even is PRICE. You must ask the question…At what price will I break even? Make a profit?

27. You can also use break even analysis to solve managerial problems: •  setting price levels •  targeting optimal variable/ fixed cost combinations •  determining the financial attractiveness of different strategic options for your company

28. The Break-Even point is the point where Total Contribution = Total Fixed Cost • At THIS point, • There is no profit, and • There is no loss

31. Development of a Break-Even Graph • The following graphs illustrate how one builds a Break-Even chart. • This company has annual fixed costs of $40, a unit selling price of $10, and a unit variable cost of $6. Since it earns $4 from each unit that it sells for $10, the company has a margin percentage of 40% of sales

32. Fixed Costs • First, one draws the fixed cost line on a graph. A flat line at the $40 level represents fixed costs.

33. Variable Costs • Next we show the variable cost line in this graph.

34. Variable Costs • Adding the variable costs to the fixed costs provides the total costs. • In Break-Even and cost-volume-profit analysis accountants assume all costs are either fixed or variable.

35. Revenue Line • This line enables one to identify the Break-Even point, the point at which the total revenue line crosses the total cost line.

36. Profit Graphs • Because the Break-Even chart has so many lines it can be confusing to read. • Accordingly, accountants have developed the Profit Graph to show the same information but with fewer lines.

37. Profit Graphs (continued) • The profit graph below shows the same information as the Break-Even chart.

38. 2. Breakeven Analysis • The breakeven point: the point at which revenue has covered costs and can become profit. • Calculated by dividing the contribution rate into the total of fixed costs.

39. 3. Menu Pricing • Fixed price, or table d’hote • Caterers traditionally rely on fixed price menus to control costs, production, service, and profit. • Requires that operators consider how to establish a selling price and still maintain a profitable overall food cost percentage.

40. 3. Menu Pricing • Individual menu items can be changed without affecting the food cost percentage and selling price. • Mixed pricing, or semi a la carte • The customer is offered a set price menu with the option of changing some courses for an additional charge per person.

41. 3. Menu Pricing • Individual course pricing, or a la carte • Offers every course item on the menu for a separate per-person price. • Requires guidance from the catering sales staff to help guests develop menus whose combinations of food items are appropriate as well as work-able from the standpoint of production.

42. 4. Price Range. • Catering menus should be established within a range of no more than $12 to $15. • By providing a limited price range, customers can be comfortable about their decision without feeling either extravagant or cheap.

43. 5. Catering Pricing Methods. • Actual cost method • Applied where the selling price is established before the cost of food is calculated. • Determines the percentage that each of the four price components represents based on costs currently incurred by the foodservice business and an established profit percentage goal.

44. 5. Catering Pricing Methods. • Food cost percentage method • Method used most frequently in restaurant operations to price individual menu items. • Determines what the selling price should be based on a known food cost percentage.

45. 5. Catering Pricing Methods. • Two of the following three factors must be known in order to apply the food cost percentage to menu pricing: • Food cost Percentage • Cost of Food (COGS F) • Selling Price • The food cost percentage method consists of three pricing formulas, one for determining each unknown factor.

46. The Formulas and their Abbreviations are as follows: 1.) food cost / food-cost % = Selling Price FC / FC% = SP 2.) food cost / selling price = food-cost % FC / SP = FC% 3.) selling price x food-cost % = food cost SP x FC% = FC

47. 5. Catering Pricing Methods. • Factor pricing • Establishes a factor that represents the food cost percentage. • Explain the factor pricing formula.

48. Factor Pricing • The Factor Pricing method establishes a factor that represents the food-cost percentage. • The factor is based on the number of times the percentage can be divided into 100: 100% / 40% = 2.5

49. Factor Method • This factor is multiplied by the food cost to calculate the selling price: $3.35 (food cost) x 2.5 (factor) = $8.37 • Management can apply the factors for the food-cost percentages most commonly used in their operation to quickly calculate selling prices.

50. 5. Catering Pricing Methods. • Food cost percentage method • Method used most frequently in restaurant operations to price individual menu items. • Determines what the selling price should be based on a known food cost percentage.