Foundations of cost control by daniel traster chapter13

• Similar concept to food cost percent and Contribution Rate is percent of sales that covers fixed costs and percent; it is everything left after variable costs are taken out... Calcul

Fixed and Variable Costs

-Fixed costs do not change as sales

Variable Rate is the percent of sales that go

toward covering variable costs It is an average over time, since the rate changes slightly from month to month

Variable Rate Graphic

VC

VR x Sales

Contribution Rate

Contribution Rate = 1 – Variable Rate

• Since CR and VR are expressed in

decimals, they add up to 1 (equivalent to 100%)

• Similar concept to food cost percent and

Contribution Rate is percent of sales that

covers fixed costs and percent; it is everything left after variable costs are taken out

Example 13a

1) Sales = Variable Cost + Fixed Cost +

Profit = $28,900 + $22,400 + $800

= $52,100 2) VR = VC ÷ Sales = $28,900 ÷ $52,100 =

Business has monthly variable costs of

$28,900, fixed costs of $22,400 and profit

of $800 Calculate total sales dollars, variable rate, and contribution rate.

Predicting Profit

When only variable rate is known (not variable costs), use the variable rate graphic to calculate variable costs, then…

Example 13b

1) Variable Cost = Variable Rate X Sales

= 0.555 X $70,000 = $38,850 2) Profit = Sales – Variable Costs – Fixed

Costs = $70,000 - $38,850 - $22,400 =

$8,750

Restaurant has VR of 0.555 and FC of

$22,400 Calculate profits if sales are

$70,000.

Correcting a Loss

To correct this problem:

A) Increase contribution rate by raising

prices or cutting variable costs.

B) Increase Sales Volume.

When a business operates at a loss, it is not earning enough to cover fixed costs.

Table 13.1: Profit Changes as VR and Sales Change

Sales Var Rate Cont

Rate

Fixed Cost

Var Cost Profit

Lessons from Table 13.1

• There is a minimum sales volume needed to generate a profit with a given variable rate and fixed cost.

• It is easier to generate profit by controlling costs than by increasing sales, but costs can only be cut so far.

Cost/Volume/Profit Analysis is a

comparison of how company’s profit shifts as business volume and variable costs change

Break-Even Point

The Break-Even Point is point at which a

business neither loses money nor earns a profit; profit= 0

Sales

Fixed Cost + Profit Contribution Rate

=

Break-Even Point

• For break-even point, insert profit = 0

• For given profit target, insert the profit

amount into the formula

Example 13c

Restaurant has fixed costs of $84,900

Variable Rate is 0.573 What is break-even point?

Example 13d

Owner of restaurant in Example 13c wants

to make $10,000 profit How many sales dollars are needed to reach the profit goal?

Converting Sales Dollars to Guests

Number of Customers

Sales Check Average

=

Use the following equation to calculate break-even point or sales needed for profit goal in terms of number of customers.

$201,171

$40.89

=

Example 13f

Annual fixed costs are $93,800; VR is 0.649 Guest check average is $27.45 What is break-even point in number of customers?

Break-Even Point Graph

Guests on X axis; Dollars on Y axis.

1) Start with horizontal line at fixed cost

amount

2) Chart sales line using check average X

guests

3) Chart total cost as variable costs + fixed

costs In a spreadsheet, this is the fixed cost amount + (Sales X VR)

Intersection of total cost and sales is

Break-Even Point

Break-Even Point Graph

Break-Even Point and Management Decisions

• Increasing sales prices makes the sales line steeper (in the graph).

• Cutting variable costs makes the total cost

line flatter.

• Either change causes the break-even point to move further left (fewer customers and

dollars)

• But either change can also reduce the

number of customers who come to the

restaurant.

Break-Even Point and Management Decisions

• By estimating change in number of customers

or sales dollars, managers can decide

whether a change to pricing or costs would

generate more profit or less profit.

• If business volume increases enough,

lowering prices can actually increase profit

• Management forecasts that by lowering

prices 10%, it would see a 7% increase in the number of customers

Would this change increase or decrease

Example 13g (cont.)

Sales = 4,200 guests X $60/guest = $252,000 Profit = $252,00 - $151,200 - $88,200 = $12,600 Also, need to know variable cost per customer VC/customer = $151,200 (VC) ÷ 4,200 (guests)

Example 13g (cont.)

New Scenario : prices down 10%, guests up 7%

Profit = Sales – VC – FC

but first recalculate new Sales and VC numbers.

Prices 10% lower = Check average 10% lower Average check = $60.00 X (1 – 0.1) = $54.00 Customers = 4,200 X (1 + 0.07) = 4,494

Cost/Volume/Profit Assumptions

• Managers cannot know for certain how

changes will impact business and profit until they are fully implemented.

• But the analyses are educated guesses, which is better than nothing.

Cost/Volume/Profit scenarios are based on

assumptions, which may or may not be accurate

Break-Even Point and Expanding Hours

• Use cost/volume/profit analysis to determine

if extending business hours makes financial sense

• Treat the additional hours as a mini-study in which the minimum additional costs that

must be incurred (including minimal labor) are treated as fixed costs and the additional sales are estimated.

Example 13h

Manager estimates that keeping the bar open an extra hour, he can bring in an extra $127 in drink sales Beverage cost is 23.5% To remain open, manager must

spend another $36 in labor and $47 in utilities and other fixed costs What is the break-even point for this extra hour?

BEP

FC 1- VR

1- 0.235

=

Marketing: 4 ways to increase revenue

1 Market Development

2 Product Development

3 Market Penetration

4 Diversification

• Food and Drink Presentation

Market to the current customer base.

Server Marketing Techniques

POS Systems and Technology

POS systems are ordered with various levels

of software (at corresponding costs), so management must decide which functions is wants the POS to do and which the

employees/managers will do by hand or on another computer system

How Technology Drives Revenue

• Recommending reservation counts

• Forecasting wait times

• Alerting management of a delay in customer

How Technology Drives Revenue

• Screens in kitchen connect to POS to

track orders and highlight delays

• Mobile phone apps allow guests to create

and settle tab without a server

• Guests can place an order for take-out

without going through a person

POS Increases service speed and maximize customer flow, by:

How Technology Drives Revenue

• Tracks business volume and item sales in

real time, so manager can make

immediate decisions to push certain

items.

• Can store guest personal information and

buying patterns, which helps with

POS Increases service speed and maximize customer flow, by:

How Technology Controls Costs

POS helps control costs by:

• Forecasting in 15-minute increments and

recommend employee schedule to match

customer flow

• Serving as company’s time clock

• Tracking employee vacation and schedule

requests

• Requiring all food ordered to be assigned to an

account and employee, so theft is difficult

How Technology Controls Costs

POS helps control costs by:

•With ingredient costs and recipes entered, POS can track standard food cost and theoretical

inventory in real time and recommend food

orders

•(Physical inventory must still be taken to check

on theft and waste)

How Technology Controls Costs

POS helps control costs by:

•POS records server tips for proper tip payment and income tax records

•POS can create data reports for most

management functions – labor cost, food cost,

expense percents, average check, etc.

•For multi-property businesses, POS can compare data reports across units or compile a single

report for all units

Why Learn the Non-Electronic Systems at All

• Each POS function requires additional

Why Learn the Non-Electronic Systems at All

• Managers must understand all of the system data and calculations to know how to use

them in making management decisions.

• POS only gives information; managers must interpret it and make decisions from it and from other non-POS information

• POS only does what it is programmed to do; manager must be able to give it the right

information for it to work effectively.