chapter 13
Revenue
Management
Class Name
Instructor Name
Date, Semester
Foundations of Cost Control
Daniel Traster
Fixed and Variable Costs
Sales
Variable
Costs
Fixed
Costs
Profit
Profit
Sales
Variable
Costs
Fixed
Costs
-Fixed costs do not change as sales change.
-Variable costs change with sales fluctuations,
but their percent of sales should remain
roughly the same.
2
Variable Rate
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 Costs
Variable Rate =
Sales
3
Variable Rate Graphic
VC
VR x Sales
VC = Variable Costs; VR = Variable Rate
4
Contribution Rate
Contribution Rate is percent of sales that covers
fixed costs and percent; it is everything left after
variable costs are taken out.
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 margin, but applied over all sales for
a longer period of time
5
Example 13a
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.
1) Sales = Variable Cost + Fixed Cost + Profit =
$28,900 + $22,400 + $800
= $52,100
1) VR = VC ÷ Sales = $28,900 ÷ $52,100 = 0.555
2) CR = 1 – VR = 1 – 0.555 = 0.445
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Predicting Profit
When only variable rate is known (not variable
costs), use the variable rate graphic to calculate
variable costs, then…
Profit
Sales
Variable
Costs
Fixed
Costs
7
Example 13b
Restaurant has VR of 0.555 and FC of $22,400.
Calculate profits if sales are $70,000.
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
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Correcting a Loss
When a business operates at a loss, it is not
earning enough to cover fixed costs.
To correct this problem:
A) Increase contribution rate by raising prices or
cutting variable costs.
B) Increase Sales Volume.
9
Table 13.1: Profit Changes as VR and Sales
Change
Sales
Var. Rate
Cont. Rate Fixed Cost Var. Cost
Profit
$150,000
0.741
0.259
$47,000
$111,150
($8,150)
$150,000
0641
0.359
$47,000
$96,150
$6,850
$150,000
0541
0.459
$47,000
$81,150
$21,850
$150,000
0.741
0.259
$47,000
$111,150
($8,150)
$175,000
0.741
0.259
$47,000
$129,675
(1,675)
$200,000
0.741
0.259
$47,000
$148,200
$4,800
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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.
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Break-Even Point
The Break-Even Point is point at which a business
neither loses money nor earns a profit; profit= 0.
Fixed Cost + Profit
Sales
=
Contribution Rate
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Break-Even Point
Can rewrite formula as…
Fixed Cost + Profit
Sales
=
1- Variable Rate
• For break-even point, insert profit = 0
• For given profit target, insert the profit amount into the
formula
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Example 13c
Restaurant has fixed costs of $84,900. Variable
Rate is 0.573. What is break-even point?
Sales =
FC+ Profit
=
1- VR
$84,900 + 0
1- 0.573
= $198,829
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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?
Sales =
FC+ Profit
=
1- VR
$84,900 + 10,000
1- 0.573
= $201,717
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Converting Sales Dollars to Guests
Use the following equation to calculate breakeven point or sales needed for profit goal in terms
of number of customers.
Sales
Number of Customers =
Check Average
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Example 13e
Restaurant hits profit target at $201,171 in sales. If
check average is $40.89, how many customers are
needed to hit the profit goal?
Number of
Customers
$201,171
Sales
=
=
Check Average
$40.89
= 4,920 customers
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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?
$93,800 +0
Sales
= $267,236
=
1 – 0.649
Customers =
$267,236
=
9,736
$27.45
Always round up for BEP calculation
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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
Wedge to right of BEP is profit; Wedge to left of BEP is
loss.
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Break-Even Point Graph
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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.
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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
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Example 13g
• Restaurant averages 4,200 guests/month.
• Monthly VC averages $151,200.
• Monthly fixed costs are $88,200.
• Average check is $60.00.
• Management forecasts that by lowering prices 10%, it
would see a 7% increase in the number of customers.
Would this change increase or
decrease profit?
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Example 13g (cont.)
Current Scenario:
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)
= $36 variable cost per guest
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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
Sales = 4,494 guests X $54/guest = $242,676
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Example 13g (cont.)
New VC =
$36 (old VC/customer) X 4,494 (new customer count)
= $161,784
Profit =
$242,676 (sales) - $161,784 (VC) - $88,200 (FC) = -$7,308
loss
Prices are best left unchanged.
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Cost/Volume/Profit Assumptions
Cost/Volume/Profit scenarios are based on
assumptions, which may or may not be
accurate.
• 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.
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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.
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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 breakeven point for this extra hour?
FC
BEP =
1- VR
=
$36 + $47
1- 0.235
= $108.50 in sales
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Example 13h (cont.)
If management gets $127 in sales, how much profit
would it make?
Variable Cost =
$127 (sales) X 0.235 (VR)
= $29.85
Profit =
$127 (sales) - $29.85 (VC) – ($36+$47) (FC)
= $14.15
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Marketing: 4 ways to increase revenue
1. Market Development
2. Product Development
3. Market Penetration
4. Diversification
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External Marketing
Market outside the 4 walls of the business to
bring in new customers.
• Advertising
• Public Relations or PR
• Signage
• Internet Exposure
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Internal Marketing
Market to the current customer base.
• Menu
• Electronic Communication
• Loyalty Programs
• Servers
• Food and Drink Presentation
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Server Marketing Techniques
Suggestive Selling
• when servers encourage sales of certain
foods or additional menu categories
Upselling
• when servers encourage the customer to
spend more money on a higher quality
product
• often used for alcohol sales.
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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.
35
How Technology Drives Revenue
POS Increases service speed and maximize
customer flow, by:
•
Recommending reservation counts
•
Forecasting wait times
•
Alerting management of a delay in customer
service
•
Vibrating pagers keep servers on floor instead of in
kitchen
•
Pagers or cell phone calls keep waiting guests
comfortable outside waiting area
•
Hand-held devices process credit cards at table 36
How Technology Drives Revenue
POS Increases service speed and maximize
customer flow, by:
•
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 creates menu mix reports for any time
period
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How Technology Drives Revenue
POS Increases service speed and maximize
customer flow, by:
•
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 service, targeted
marketing, and loyalty building
•
Technology must support the company’s brand
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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
•
With recipes, POS can use menu mix and forecasts to
adjust recipe yields and generate kitchen production
schedule
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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)
•POS can notify managers of employees with large
number of voids, no sales, or other errors
•POS is a cash register and can notify manager when to
empty till or get change
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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
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Why Learn the Non-Electronic Systems at All
• Each POS function requires additional purchase cost
• Some functions require extensive employee data
input for them to work at all
• Working by hand or on a standard computer may be
more cost-effective
• Managers must keep working when the power goes
out.
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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.
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