Lecture Food and beverage cost control (5th Edition): Chapter 10 - Dopson, Hayes, Miller 

Chapter 10 - Planning for profit. This chapter presents the following content: Financial analysis and profit planning, menu analysis, cost/volume/profit analysis, the budget, developing the budget, monitoring the budget, technology tools.

Planning For Profit

 Budgeting allows you to plan your next year’s 

operating results by projecting sales, expenses, and profits to develop the budgeted P&L statement

 Three of the most popular systems of menu analysis 

are food cost%, contribution margin, and goal value analysis

Figure 10.1 Three Methods of Menu Analysis

Analysis

2 Contribution margin a Contribution margin

3 Goal value analysis a Contribution margin %

Achieve predetermined profit % goals

Figure 10.2 Maureen's Menu Analysis Worksheet

Date: 1/1 - 1/7

Menu Item # Sold

Selling Price

Total Sales

Item Cost

Total Cost

Item Contribution Margin

Total Contribution Margin

Food Cost

%

Strip Steak 73 $17.95 $1,310.35 $8.08 $ 589.84 $9.87 $720.51 45% Coconut Shrimp 121 16.95 2,050.95 5.09 615.89 11.86 1,435.06 30 Grilled Tuna 105 17.95 1,884.75 7.18 753.90 10.77 1,130.85 40 Chicken Breast 140 13.95 1,953.00 3.07 429.80 10.88 1,523.20 22 Lobster Stir-Fry 51 21.95 1,119.45 11.19 570.69 10.76 548.76 51 Scallops/Pasta 85 14.95 1,270.75 3.59 305.15 11.36 965.60 24 Beef Medallions 125 15.95 1,993.75 5.90 737.50 10.05 1,256.25 37

 To analyze a menu using the food cost percentage 

method, you must separate menu items based on two variables:

2 High food cost % High popularity

Low

3 Low food cost % Low popularity

4 Low food cost % High popularity

 The characteristics of the menu items that fall into 

each of the four matrix squares are unique and thus should be marketed differently

Figure 10.3 Analysis of Food Cost Matrix Results Square Characteristics Problem Marketing Strategy

1 High food cost

%, low popularity Marginal due to both high product

cost and lack of sales

a Remove from the menu

b Consider current food trends to determine if the item itself is unpopular, or if its method of preparation is

c Survey guests to determine current wants regarding this item

d If this is a high-contribution-margin item, consider reducing price and/or portion size

2 High food cost

%, high popularity

Marginal due to high product cost a Increase price b Reduce prominence on the menu

c Reduce portion size

d “Bundle” the sale of this item with one that has a lower cost, and, thus provides better overall food cost %

3 Low food cost %, low popularity

Marginal due to lack of sales

a Relocate on the menu for greater visibility

b Take off the regular menu and run

as specials

c Reduce menu price

d Eliminate other unpopular menu items in order to increase demand for this one

4 Low food cost %, high popularity None a Promote well b Increase visibility on the menu

 Contribution margin per menu item is defined as 

the amount that remains after the product cost of the menu item is subtracted from the item’s selling 

price

      Selling Price – Product Cost

= Contribution Margin per Menu Item

Total Sales - Total Product Costs

= Total Contribution Margin

Total Contribution Margin Number of Items Sold

= Average Contribution Margin per Item

popularity.

 To analyze a menu using the contribution margin 

approach, you must separate menu items based on two variables:

High

1 High Contribution Margin Low Popularity

2 High Contribution Margin High Popularity

Low

3 Low Contribution Margin Low Popularity

4 Low Contribution Margin High Popularity

 Each of the menu items that fall in the squares 

requires a special marketing strategy, depending on its square location

 A frequent and legitimate criticism of the 

contribution margin approach to menu analysis is the it tends to favor high­priced menu items over low­priced ones, since higher priced menu items, in general, tend to have the highest contribution 

margin

Figure 10.4 Analysis of Contribution Margin Matrix Results

Square Characteristics Problem Marketing Strategy

1 High contribution

margin, low popularity

Marginal due to lack of sales a Relocate on menu for greater visibility

b Consider reducing selling price

2 High contribution

margin, high popularity

None a Promote well

b Increase prominence on the menu

3 Low contribution

margin, low popularity

Marginal due to both low

contribution margin and lack

of sales

a Remove from menu

b Consider offering as a special occasionally, but at a higher menu price

4 Low contribution

margin, high popularity

Marginal due to low contribution margin

 The selection of either food cost percentage or 

contribution margin as a menu analysis technique is really an attempt by the foodservice operator to 

possible with two­dimensional matrix analysis.

profitability percentage. 

Figure 10.5 Maureen’s Goal Value Analysis Data

Item

Food Cost % (in decimal form)

Number Sold

Selling Price

Variable Cost % (in decimal form)

Figure 10.6: Goal Value Analysis Results

 Items that do not achieve targeted goal value tend to 

be deficient in one or more of the key areas of food cost percentage, popularity, selling price, or variable cost percentage. 

 A purely quantitative approach to menu analysis is 

neither practical nor desirable. Menu analysis and pricing decisions are always a matter of experience, skill, insight and educated predicting

Figure 10.7 Solving for Goal Value Unknowns

Known Variables Unknown Variables Method to Find Unknown

Figure 10.9 Contribution Margin Income Statement

Jennifer’s

     Fixed Costs

Contribution Margin per Unit (Guest) =

Figure 10.10: Contribution Margin Income Statement with per-Unit and Percentage Calculations

After-Tax Profit

After Tax Profit

 In terms of calculating the number of guests that 

must be served in order to make a profit, use the 

following formula:

Fixed Costs + Before-Tax Profit

Contribution Margin per Unit (Guest)

= Guests to Be Served to Achieve Desired

After-Tax Profit

 Linking Cost/Volume/Profit Analysis with Goal 

Value Analysis

Cost/volume/profit analysis is used to establish targets for the entire operation, whereas, goal value analysis evaluates individual menu items against those operational targets.  Therefore, the two analyses can be strategically linked

from contribution margin  income statement

Variable cost % goal

Figure 10.11 Linking Cost/Volume/Profit with Goal Value Analysis

Priscilla’s Mexican Restaurant - June

Per Unit (Guest)

Before tax profit $20,000.00

Break-even point in guests

served 15,000.0 Rounded up = 15,000

Break-even point in sales

dollars

$225,000.00 Guests served to achieve

desired after-tax profit 18,333.3 Rounded up = 18,334

Sales dollars to achieve

desired after-tax profit

Total average number of

Goal Value Analysis Data

Cost % (in decimal form)

Number Sold

Cost % (in decimal form)

Number Sold

Selling Price

Variable Cost % (in decimal form)

Goal Value

 Minimum Sales Point (MSP) is the sales volume 

required to justify staying open for a given period of time

 Fixed costs are eliminated from the calculation 

because even if volume of sales equals zero, fixed costs still exist and must be paid

 In calculating MSP, food cost % + variable cost % is 

called the minimum operating cost. 

 The MSP formula is shown as follows:

 Corporate policy, contractual hours, promotion of a new unit, 

competition and other factors must all be taken into account  before the decision is made to modify operational hours.

Minimum Labor Cost

or

Minimum Labor Cost

 The budget, or financial plan, will detail the 

operational direction of your unit and your expected financial results

 The budget should not be a static document. It 

should be modified and fine­tuned as managerial 

accounting presents data about sales and costs that affect the direction of the overall operation. 

 Just as the P&L tells about your past performance, 

the budget is developed to help you achieve your future goals

 The achievement budget is always a shorter range, 

perhaps a month or a week. It provides current 

operating information and thus assists in making 

current operational decisions. 

Figure 10.12 Levi's Last-Year Operating Results

Patient Meals Served: 29,200 Revenue per Meal: $3.46

Additional Meals Served:109,528

Total Meals Served: 138,728

 To determine a food budget, compute the estimated 

food cost as follows:

1 Last Year’s Food Cost per Meal = Last Year’s

Cost of Food / Total Meals Served

2 Last Year’s Food Cost per Meal + % Estimated

Increase in Food Cost = This Year’s Food Cost

per Meal

3 This Year’s Food Cost Per Meal x Number of

Meals to Be Served This Year = Estimated Cost of Food This Year

 To determine labor budget, compute the estimated 

food cost as follows:

1 Last Year’s Labor Cost per Meal = Last Year’s

Cost of Labor / Total Meals Served

2 Last Year’s Labor Cost per Meal + % Estimated

Increase in Labor Cost = This Year’s Labor Cost per Meal

3 This Year’s Labor Cost per Meal x Number of

Meals to Be Served This Year = Estimated Cost

of Labor This Year

Figure 10.13 Levi’s Budget for Next Year

Additional Meals Budgeted: 115,000

Total Meals Budgeted: 144,200

2 Replacement of all incandescent lighting with an 

appropriate type of electric discharge lamp (such as  fluorescent, mercury vapor, metal halide or sodium)  wherever possible.

3 The use of dual­flush, low­flow or waterless toilets to 

reduce water waste. 

4 Installing low­flow faucet aerators on all sinks to cut 

water usage by as much as 40%; from a standard 4  gallons per minute to a cost­saving 2.5 gallons a minute. 

5 Implementation of an effective preventive maintenance 

program for all cooking equipment including frequent and  accurate temperature recalibrations.

6 Reducing waste disposal costs by implementing effective 

source reduction plans as well as pre and post­production  recycling efforts

Figure 10.14 College Cafeteria Revenue Budget Summary

Time Period: First 6 Months

 Some foodservice operators relate revenue to the 

number of seats they have available in their 

operation. The formula for the computation of sales per seat is as follows:

Total Sales

 Developing Yardstick Standards for Food

Step 1.  Divide total inventory into management 

designated sub­groups, for example, meats, produce, dairy, and groceries

Step 7 Compare weekly revenue and expense to 

projection. Correct if necessary

Figure 10.15 Marion's College Cafeteria Food Data

Last School Year (9 Months)

Step 3.  Establish sales volume for the prior 

accounting period

Step 4 Determine percentage of labor dollar spent 

for each subgroup

Step 7.  Compare weekly revenue and expense to 

projection. Correct if necessary

Figure 10.16 Marion's College Cafeteria Labor Data

Last School Year (9 Months)

 As business conditions change, changes in the budget are to 

be expected. This is because budgets are based on a specific  set of assumptions, and if these assumptions change, so too  will the budget.

 Budgeted profit levels must be realized if an operation is to 

provide adequate returns for owner and investor risk.

 The primary purpose of management is to generate the 

profits needed to continue the business. Budgeting for these  profits is a fundamental step in the process.

 The software required to do an overall break­even 

analysis is readily available, as well as the required analysis for budgeting