Any skilled craftsman knows that keeping his or her tools clean and in good working order will make them last longer and perform better. The same is true for tools and equipment in foodservice facilities. A properly designed and implemented preventive maintenance program can go a long way toward reducing equipment failure and, thus, decreasing equipment and facility-related costs. Proper care of mechanical equipment not only prolongs its life but also reduces operational costs. As prices for water, gas, and other energy sources needed to operate facilities continue to rise, you must implement a facility repair and maintenance program that seeks to discover and treat minor equipment and facility problems before they become major problems.
One way to help ensure that costs are as low as possible is to use a competitive- bid process before awarding contracts for services you require. For example, if you hire a carpet cleaning company to clean your dining room carpets monthly, it is a good idea to annually seek competitive bids from new carpet cleaners. This can help to reduce your costs by ensuring that the carpet cleaner you select has given you a price that is competitive with other service providers in the area. For general main- tenance contracts in such areas such as the kitchen or for mechanical equipment, elevators, or grounds, it is recommended that these contracts be put out for bid at least once per year. This is especially true if the dollar value of the contract is large.
To help control equipment maintenance and repair costs, air-conditioning, plumbing, heating, and refrigerated units should be inspected at least yearly, and kitchen equipment, such as dishwashers, slicers, and mixers, should be inspected at least monthly for preventive maintenance purposes. A form similar to the one shown in Figure 8.12 is useful in this process.
FIGURE 8.12 Equipment Inspection Report
Unit Name: Your Restaurant Time Period: 1/1–1/31
Item Inspected Inspection Date Inspected By Action Recommended
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Some foodservice managers operate facilities that are large enough to employ their own full-time maintenance staff. If this is the case, make sure these employees have copies of the operating and maintenance manuals of all equipment. These documents can prove invaluable in the reduction of equipment and facility-related operating and repair costs.
Fun on the Web!
Record keeping is one of the most important aspects of a preventive maintenance program. To see examples of software programs developed to help you record and plan preventive maintenance activities for your equipment, enter “restaurant equipment maintenance software” into your favorite search engine and review the results.
Cost Control Around the world
In a large number of cases, those who operate American chain restaurants outside the United States will experi- ence equipment repair and replacement costs that are higher than their US-based counterparts. That’s because, in many cases, a franchised restaurant’s popularity is tied closely to the type of equipment or facility it requires for the production of its most popular menu items. When these key facility-related pieces of equipment are missing because repair service or spare parts are not readily avail- able in foreign countries, the results can be disastrous.
For example, imagine a McDonald’s with a US-built fryer that needs a replacement part, a Dairy Queen with a
malfunctioning “Blizzard” machine, or a Rainforest Cafe with a defective sound system. You can easily see how the character (and popularity) of those restaurants would be significantly and negatively altered if one or more of these critical pieces of equipment were unavailable for a significant amount of time.
In many cases, foodservice operators will find it more difficult to build, service, and maintain their physical facilities in foreign countries. This is especially true if the company has not identified a dependable, cost-effective, and local service representative for the building they occupy or the major equipment they utilize.
Fun on the Web!
Finding reliable service and repair for foodservice equipment is always an issue for managers. This is especially the case for those operators whose restaurants are located in less-populated areas of the world or in areas where service on popular equipment is hard to obtain. Fortunately, some quality companies do offer virtually “worldwide”
sales and service. To view one such company, go to the “Hobart” company’s website.
When you arrive at the site, click “Locate Hobart in Your Region” to view a list of the international sales and service centers maintained by this high-quality foodservice equipment and consulting company.
Managing OCCupanCy COsts
Occupancy costs refer to those expenses incurred by a foodservice unit that are related to occupying and paying for its physical facility (building). For the foodser- vice manager who is not the owner, the majority of occupancy costs will be non- controllable. Rent, mortgages, taxes, and interest on debt are real costs but are most often beyond the immediate control of the unit manager. However, if you own the facility you manage, occupancy costs are a primary determinant of both profit on your sales and return on dollars invested in your operation.
If your occupancy costs are too high because of unfavorable rent or lease arrangements or due to excessive debts and required loan repayments, you may face extreme difficulty in generating profits. Food, beverage, labor, and other controllable
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operating expenses can only be managed to a point—beyond that, efforts to reduce costs excessively can result in decreased product quality, reduced guest service levels and lower guest satisfaction. If occupancy costs are unrealistically high, no amount of effective cost control can help “save” the operation’s profitability.
Total controllable and non-controllable other expenses in an operation can range from 5 to 15 percent or even more of the unit’s total sales. Experienced man- agers know that, although other expenses are sometimes considered to be minor expenses, they are extremely important to overall operational profitability. This is especially true in a situation where the number of guests you serve is fixed, or nearly so, and the prices you are allowed to charge for your products is fixed as well. In a case such as this, your ability to control your operation’s other expenses will be vital to your success.
In this and the previous chapters of this text, you have learned a great deal about the ways managers control their food, labor, and other expense costs. In the next chapter, you will learn how foodservice managers report and then analyze their actual operating results.
Technology Tools
Those expenses that are related to neither food nor labor were introduced in this chapter. Depending on the specific foodservice operation, these costs can represent a significant portion of the operation’s total expense requirements.
As a result, controlling these costs is just as important as controlling food- and labor-related costs. Software and hardware that can be purchased to assist in this area include applications that relate to:
1. Assessing and monitoring utilities cost
2. Minimizing energy costs via the use of motion-activated sensors 3. Managing equipment maintenance records
4. Tracking marketing costs/benefits
5. Menu and promotional materials printing hardware and software
6. Analysis of communications costs (telephone tolls, websites, and social media) 7. Analysis of all other expense costs on a “cost per guest” basis
8. Analysis of all other expense costs on a “cost per dollar sale” basis
9. Comparing building/contents insurance costs across alternative insurance providers
10. Software programs designed to assist in the preparation of the income statement, balance sheet, and the statement of cash flows
11. Income tax management 12. Income tax filing
The unique needs of an individual restaurant will heavily influence which other expense software programs and applications would be helpful. At a minimum, most independent operators should computerize their records related to taxes at all levels to ensure accuracy, safekeeping, and timeliness of required filings.
Hyewon Kim owns her own catering business. She continually monitors her other expense costs, including the cost of liability insurance for drivers of her catering vans.
This year, Hyewon’s auto insurer advises her that insurance rates for her coverage will increase by 15 percent next year. The insurance company also states that if Hyewon will institute a preemployment drug-testing program for those employees who will drive her vans, there will be no insurance rate increase.
Apply What You Have Learned
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Hyewon does not currently require potential employees to agree to be drug- tested prior to becoming employed in her business, but it is legal to do so in her state.
1. If you were Hyewon, would you implement the drug-testing program?
Why or why not?
2. What additional costs will Hyewon incur if such a program were implemented?
3. What should Hyewon tell potential employees about her reason for implementing a preemployment drug-testing program? What should she do if a potential employee refuses to agree to the test?
Key Terms and Concepts
The following are terms and concepts discussed in the chapter that are important for you as a manager. To help you review, please define the terms below.
other controllable expenses non-controllable
expenses
standard operating procedure (SOP)
fixed expense variable expense mixed expense management by
exception
kilowatt-hour (kWh)
heating, ventilation, and air-conditioning (HVAC)
occupancy costs
You may download the Excel spreadsheets for the Test Your Skills exercises from the student companion website at www.wiley.com/college/dopson. Complete the exercises by placing your answers in the shaded boxes and answering the questions as indicated.
1. Sophia owns and operates a restaurant featuring Lobster Rolls and Fried Cod Sandwiches. She is evaluating her revenue and expenses for last month.
Help Sophia assess her operation’s profit and other expense performance by completing the following revenue and expense worksheet.
Sophia’s Restaurant Amount Percentage
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2. Susie operates a restaurant in the ski resort town of Asvail. She has decided to group her Other Expenses categories in terms of either fixed expenses or variable expenses. Place an X in the Variable Expense column for those expenses that vary with sales volume. For expenses that do not vary with sales, place an X in the Fixed Expense column.
Other Expenses Variable Expense Fixed Expense
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3. Tutti owns a fine-dining restaurant in a suburb of a major coastal city. Last year, her sales were not as high as she would have liked. To help increase her sales volume, Tutti decided to hire a sales consultant, Tina Boniner, to help bring in more customers.
Tutti hired Tina on a trial basis for the first six months of the year. Tina was paid a fixed fee of $1,000 per month and a commission of 1 percent of all sales. At the end of June, Tutti wants to evaluate whether she should hire Tina for the next six months. Calculate Tutti’s sales consultant cost percentage.
Mixed Expense—Sales Consultant
For Period: 1/1–6/30
Month Sales
Fixed Fee
1% Variable Expense
Total
Expense Cost %
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a. Tutti has decided that she cannot spend more than 2.2 percent of total sales for Tina’s services. Based on the six-month average cost percentage, can Tutti afford to hire Tina for another six months?
b. Last year’s average monthly sales for the first six months was $80,000.
Based on this year’s sales data, has Tina done a good job at increasing sales? Should she be hired again?
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4. John owns and operates the End Zone Steakhouse. He would like to turn the operation over to his son Zeke, a graduate of Spartacus High School.
Zeke, however, has no foodservice background. Zeke would like to prove that he can effectively operate the restaurant and that he would be good at controlling costs. Operating cost categories for the restaurant, in terms of other expenses, are as follows. Place an X in the Controllable column for those operating expenses that Zeke could control. If he could not control the cost, place an X in the Non-controllable column.
Other Expenses Controllable Non-controllable
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5. Shanna operates a lounge in an extremely popular downtown convention hotel. The hotel regularly operates around the 80 percent occupancy mark, and its lounge, Luigi’s, is very often filled to capacity. On weeks when busi- ness at the hotel is slower, Shanna attempts to build local sales by scheduling a variety of popular bands to play on the stage. She must select one band to play on Saturday night, six weeks from now, when the hotel is not busy.
She has kept records of the costs and sales volume of the last four bands she has booked.
a. Compute both band expense percentage and cost per guest served. Based on the cost percentage of the bands, which one should Shanna select for booking?
Expense percentage and Cost per Guest Served—Bands Unit Name: Luigi’s Lounge
Date Band
Band Expense
Lounge
Sales Cost %
Number of Guests Served
Cost per Guest Served
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b. Would your answer change if you knew Shanna charged a $5.00 cover charge to enter the lounge on the nights she has a band, and that the cover charge is reported separately from the lounge sales? If so, which band would you choose?
Date Band
Number of Guests Served
Cover Charge per Guest
Total Cover Charges
Lounge Sales
Total Sales
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6. Marjorie manages a 200-seat, white-tablecloth restaurant in an upscale neighborhood. Since her guests expect her tablecloths and napkins to be really white, she sends her linens to a local laundry service daily. The laundry service charges her by the piece. She wants to keep track of her laundry cost per guest to see if she can use the information to control her laundry costs better. Help her complete her six-column cost per guest report. She has budgeted $0.60 per guest on average. How is she doing at controlling her laundry costs?
Six-Column Cost per Guest—Laundry Service
Unit Name: Marjorie’s Date: 5/1–5/7
Laundry Service Cost
Number of
Guests Served Cost Per Guest Weekday Today To Date Today To Date Today To Date
1 $225
2
3
4
5 275
6
7
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7. Josiam operates the foodservice at Springdale Valley school system. He has just been informed by City Power, the electrical company in his area, that the rate per kilowatt-hour (kWh) for the school system’s kitchens will be rising from $0.085 per kWh to $0.092 per kWh beginning next academic year (September). Based on last year’s bill, what was each kitchen’s electric- ity usage?
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Assuming no operating changes, how much more will be spent next year?
Who are some of Josiam’s best resources for discovering ways to limit elec- tricity usage in the kitchens?
School
Electricity Cost Last Year
Number of kWh Used Last Year
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8. Enrique has located the perfect spot for his restaurant. It is 3,000 square feet in the local mall, and the mall managers have given him the following monthly lease options:
Option 1: Pay a flat fee of $2.00 per square foot per month.
Option 2: Pay a flat fee of $3,000 per month plus 5 percent of food sales.
Enrique estimates that his sales for the coming year will be as shown below. Calculate the monthly lease amount for both options.
Which lease option should Enrique choose? Why?
Option 1 Option 2
Month
Sales Forecast
No. of Square Feet
Flat Fee per Square Foot
Monthly Lease $
Flat Fee per Month
Five % of Sales
Monthly Lease $
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9. Libbey Hocking is the owner of the Hummingbird, an all-organic restaurant featuring fresh salads and a variety of vegetarian entrée dishes. As part of a dining room redesign, she is replacing all of the glassware in her 100-seat restaurant. Libbey would like to purchase 40 dozen glasses. Her glassware vendor has offered her similarly styled glassware at three different quality levels. The highest-quality glassware would cost Libbey $50.00 per dozen.
The average life expectancy of these glasses is 1,000 uses before they either break or chip. A lower-priced, mid-quality glass sells for $35.00 per dozen and has an expected life of 750 uses. The least-expensive glasses sell for
$26.00 per dozen and have an expected life of 500 uses. Help Libbey get more information to assess her best purchase choice by completing the fol- lowing product cost comparison worksheet. (Spreadsheet hint: Format the
“Per Use Cost” column to five decimal places.)
Hummingbird’s Glassware Purchase Worksheet
Product Durability
Price per Dozen
Number of Dozens
Total Cost
Total Number of Glasses
Per Glass Cost
Estimated Uses Per Glass
Per Use Cost )JHIFTU
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a. Based on cost per use only, which quality glass should Libbey purchase?
b. What non–purchase price factors might influence Libbey’s choice of glassware?
c. If you were Libbey, which product alternative would you select? Explain your answer.
10. The cost of maintaining an effective website as well as its social media presence is an increasingly important marketing cost for every foodservice operation. Name some specific “Other Expense” costs that you feel could be reduced through the effective use of an operation’s website and social media presence.
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CHAPTER 9
Analyzing Results Using the Income Statement
At the conclusion of this chapter, you will be able to:
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LEARNING OUTCOMES OVERVIEW
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Chapter Outline
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