This can be a risky method if it ignores costs, because if variable costs are higher than prices, profits will be eroded.. Some restaurant operators set their food menu prices below cost
Trang 1RELEVANT REVENUE, COSTS AND
DECISION-MAKING
I Questions
1 Price-cutting Method Price cutting occurs when prices are reduced below those
of the competition This can be a risky method if it ignores costs, because if variable costs are higher than prices, profits will be eroded Some restaurant operators set their food menu prices below costs on the risky assumption they will more than make up the losses by profits on alcoholic beverage sales To use this method, the reduction in prices must be more than compensated by selling additional products If the extra business gained is simply taken away from competitors, they will also be forced to reduce their prices and a price war may result
Competitive Method Competitive pricing means matching prices to those of the
competition and then differentiating in such areas as location, atmosphere, and other nonprice factors When there is one dominant operator in the market that generally takes the lead in establishing prices, with its close competitors matching increases and decreases, this method is then referred to as the follow-the-leader method Competitive pricing tends to ensure there is no price cutting and resulting reduction in profits In other words, there is market price stability This may be a useful method in the short run However, if competitive pricing is used without knowledge of the differences that exist (in such matters as product and costs) between one establishment and another, then this method can be risky
Markup Method The markup method is used, for example, when a restaurant’s
traditional food cost percentage (as it appears on past income statements) is applied to determine the price of any new menu items offered For example, if traditionally the restaurant has been operating at a 40% food cost, any new menu items offered will be priced so that they also result in a 40% food cost The major problem with this method is that it assumes that 40% is the correct food cost for the restaurant to achieve its desired profit
2 Factors considered include the menu price ranges needed to accommodate clientele catered to; gross margin of different menu items; and pricing of the competition
3 Food cost percentage is important to menu pricing to ensure that the selling price is high enough to cover the cost of food and provide a profit margin
Trang 24 Menu engineering is a sophisticated and fairly complex approach that considers
both the profitability and popularity of competing menu items.
5 Average room rate is determined by dividing the Rooms Department Revenue
by Rooms expected to be sold Refer to page 192
II Practical Exercises and Problems
A EXERCISES
EXERCISE 1
Actual room rates vary Some customers may choose rooms with higher rate because of the amenities available while some may choose rooms with lower rates
EXERCISE 2
Operating income
EXERCISE 3
Assume that level of operation is at break-even point and “x” represents total revenue:
x – 0.84x – P145,000 = 0
0.16x = P145,000
x = P906,250
EXERCISE 4
Average check
EXERCISE 5
= 88 x 2.5 x 26P46,800
= P46,8005,720 = P8.18
= 108 x 1.75 x 3120.65 x P988,000
= 1 – 0.20P28,000
= P28,0000.80 = P35,000
Trang 3Average check, dinner
EXERCISE 6
Room double occupancy percentage
EXERCISE 7
Rooms to be sold = Rooms available x Occupancy rate x 365
= 40 x 70% x 365
= 10,220 Average room rate
EXERCISE 8
Singles = 40 – 15 = 25
25x + 15 (x + 80) = P18,800
25x + 15x + 1,200 = P18,800
– 1,200 – 1,200
x = P440 (single) double = P440 + P80
= P520
B PROBLEMS
PROBLEM 1
Requirement (1)
= P642,20058,968 = P10.89
= 10,512 – 8,760 = 1,752
= 1,7528,760 = 20%
= P388,35010,220 = P38.00
Trang 4Multiple = 1 / 0.30 = 3.33
Ingredient Cost Multiple New Price
Requirement (2)
Refer to the discussion on mark-up approaches to pricing on pages 190 to 192
PROBLEM 2
Requirement (1)
Sandwich Selling Price Number Sold
Requirement (2)
Requirement (3)
Food cost percentage = P1,604P6,320 = 25.38%
Trang 5Requirement (4)
Less: Total Costs 1,604 00
Total Contribution Margin P4,716.00
Divide by: Total number sold ÷ 1,565
Average Contribution Margin P 3 01
PROBLEM 3
Requirement (1)
Alternative 1
Selling Price
Food Cost
Meals Sold Revenue
Total Cost of Food
Gross Profit
Chicken P 5.95 P1.78 400 P2,380.00 P 712.00 P1,668.00
Steak P11.95 P5.97 100 1,195.00 597.00 598.00
1,000 P7,450.00 P2,754.00 P4,696.00
Alternative 2
Selling Price Food Cost Meals Sold Revenue
Total Cost of Food Gross Profit
Chicken P 5.95 P1.78 350 P2,082.50 P 623.00 P1,459.50
Steak P11.95 P5.97 150 1,792.50 895.50 897.00
1,000 P7,750.00 P2,963.50 P4,786.50
Alternative 3
Selling
Price Food Cost Meals Sold Revenue
Total Cost of Food Gross Profit
Chicken P 5.95 P1.78 100 P 595.00 P 178.00 P 417.00
Steak P11.95 P5.97 500 5,975.00 2,985.00 2,990.00
1,000 P9,850.00 P4,422.50 P5,427.50
Sales
Mix
Alternativ
e
Total Revenue
Total Cost of Food
Gross Profit
Food Cost Percentage
Gross Margin Per Meal
Trang 61 P7,450 P2,754.00 P4,696.00 36.97% P4.70
Requirement (2)
Sales Mix # 3 is preferred because it yields the highest gross profit
PROBLEM 4
Requirement (a)
Return on owner investment:
Net income after tax = P80,000 x 0.15 = P12,000
Calculation of Income before tax:
= Income before tax
Desired operating profit before tax 16,000
S
NI after tax
1 – Tax rate
P16,000
NI after tax
1 – Tax rate = 1 – 0.25P12,000 = P12,0000.75 =
Fixed Costs
= P77,600 + P16,00018%
= P93,60018% = P520,000
Trang 7Sales revenue (P93,600 / 0.18) P520,000
Food cost, wage cost and other costs (P520,000 x 0.82) (426,400)
Total operating costs including interest (77,600)
Requirement (b)
Average check = 60 x 2.5 x 365P520,000
= P520,00054,750 = P9.50