Cost Control and the Menu—Determining
Selling Prices and Product Mix
4
OH 4-1
4-1
 Controlling Foodservice Costs
Chapter Learning Objectives
 Determine a selling price based on various
markup methods.
 Explain how market forces affect menu prices.
 Explain how the menu product mix is used to
determine the composite food cost of a menu.
 Explain how the menu helps with
food cost control.
OH 4-2
Menu Prices
 If they are too high;
Sales suffer
 If they are too low;
Profits suffer
OH 4-3
Menu Prices Should
 Be directly related to costs
 Help predict profitability
 Serve as a cost control tool
 Reflect realistic markups (the difference
between a menu item’s cost and selling price)
OH 4-4
Pro Forma Income Statement
as Budget Standard
OH 4-5
Industry Standards
 Restaurants typically run in the low to mid 30%
 Italian - ~ 28%
 Multi Unit - ~ 32%
 American/Regional - ~35%
 Steak - ~ 40%
 Prime Cost = 65% (some industry professionals
like to see this nearer to 55%)
OH 4-6
Menu Pricing Methods
 The Texas Restaurant Association (TRA)
Markup Method
 The Factor Method
 The Markup on Cost Method
OH 4-7
The Texas Restaurant Association (TRA)
Markup Method
Step 1 – Add target percentage values for labor, all
other expenses (except food), and profit.
Example
Labor
All other expense (except food)
+
.25
.30
Profit
+
.10
Total
OH 4-8
.65
The Texas Restaurant Association (TRA)
Markup Method continued
Step 2 – Subtract the total in Step 1 from 1.00.
Example
1.00
Total from Step 1
Divisor
OH 4-9
– 0.65
0.35
The Texas Restaurant Association (TRA)
Markup Method continued
Step 3 – Divide the standard portion cost of the
item by the divisor to obtain the menu
selling price.
Menu item standard
portion cost
$4.10
OH 4-10
÷ Divisor = Menu selling price
÷
0.35
=
$11.71
The Texas Restaurant Association (TRA)
Markup Method continued
The Texas Restaurant Association’s menu pricing formula
considers labor costs when determining selling prices.
OH 4-11
The Factor Method
 Determines menu prices based upon the
standard (target) food cost percentage
 Involves a two-step process
OH 4-12
The Factor Method continued
Step 1 – Calculate the appropriate factor using the
following formula.
OH 4-13
1.00
÷
1.00
÷
Standard food cost
percentage
0.35
=
Factor
=
2.86
The Factor Method continued
Step 2 – Calculate the menu price using the
following formula.
Factor
2.86
OH 4-14
x Menu item cost
= Selling price
x
=
$4.10
$11.73
The Markup on Cost Method
 Is popular
 Is easy to use
To calculate menu prices, use the following
formula.
Menu item
cost
$4.10
OH 4-15
÷
÷
Standard food cost
= Selling price
percentage
0.35
=
$11.71
Market Forces Affect Selling Prices
Menu prices can be affected by a variety of external
forces, including
 Competition
 Price-value relationship
 Mark-Up Differentiation
OH 4-16
Markups Affect Selling Prices
 Different menu items
are typically marked up
by different amounts.
 In general, the lower
the menu item cost, the
higher the markup (and
the lower the food cost
percentage).
OH 4-17
Menu Product Mix Is Important
 Restaurants must achieve their standard
(targeted) food cost percentage.
 If a restaurant exceeds its food cost standard,
profits will likely decline.
 Menu items sell at a variety of cost percentages.
OH 4-18
Menu Product Mix Is Important continued
 The average food cost percentage is determined
by menu mix.
 Menu mix significantly determines a restaurant’s
food cost percentage target.
OH 4-19
Composite Food Cost Percent
 Wrong way to determine average food cost
percent
Menu Item
# Sold Unit
Total Cost Selling Food
Total
Cost
Price
Cost % Sales
20 $2.00
$40.00
$5.95
34% $119.00
Hamburger
Fries
5 $0.50
$2.50
1.25
40%
$6.25
Soda
10 $0.15
$1.50
.79
19%
$7.90
Total
35
$44.50
$133.15
34+40+19=
÷
93
OH 4-20
3
=
31% FC
Composite Food Cost Percent continued
 Right way to determine is by weighted average
food cost
Menu Item
Hamburger
# Sold Unit
Total Cost Selling Food
Total
Cost
Price
Cost % Sales
20 $2.00
$40.00
$5.95
34% $119.00
Fries
5 $0.50
$2.50
1.25
40%
$6.25
Soda
10 $0.15
$1.50
.79
19%
$7.90
Total
$44.50
OH 4-21
35
÷
$44.00
$133.15
=
$133.15
33% FC
Menu Product Mix
 It is not possible to add unweighted unit costs to
determine average unit costs.
 It is not possible to add unweighted food cost
percentages.
 A menu product mix spreadsheet helps
determine the total (weighted) food cost
percentage.
OH 4-22
Menu Product Mix Spreadsheet
 Lists the names of all menu items sold
 Lists the number of times each item has sold
 Identifies the unit item cost of each item
OH 4-23
Menu Product Mix Spreadsheet continued
 Lists each menu item’s selling price
 Identifies the total cost of each item
(number sold x item cost)
 Lists the total sales achieved by each item
(number sold x selling price)
OH 4-24
Menu Product Mix continued
 The items that guests
select have a
significant impact on
a restaurant’s
weighted food cost
percentage.
 Menu Item Popularity
Index is critical
information
OH 4-25
Menu Item Popularity Index
 Ratio of portions sold for a given menu item to
total portion sales for all menu items
 Key element in forecasting sales
 Critical in menu evaluation
Popularity Index = Portion sales for item x 100
Total portion sales of
all menu items
OH 4-26
Menu Item Popularity Index
Menu Item
Popularity Index %
Strip Steak
145
23.4
Ginger Shrimp
116
18.7
Duck Breast
21
3.3
Lamb Chops
11
1.8
Pork Loin
45
7.3
Vegetarian Burrito
50
8.2
Veal Steak
120
19.4
Steak Diane
111
17.9
619
100%
Total Covers
OH 4-27
Number Sold
Menu Engineering (Contribution Analysis)
 Method of menu evaluation or analysis
 Considers menu product mix
 Considers contribution margin (selling price minus
menu item food cost)
 Considers popularity (number of items sold)
OH 4-28
Menu Engineering
Menu
Item
Number
Sold
Pop
Index %
Food
Cost
Selling
Price
Item
CM
Strip Steak
145
23.4
$7.50
$23.65
$16.15
Ginger
Shrimp
116
18.7
$5.20
$18.00
$12.80
Duck
Breast
21
3.3
$7.30
$21.50
$14.20
Lamb
Chops
11
1.8
$6.90
$22.00
$15.10
Pork Loin
45
7.3
$6.30
$20.50
$14.20
Vegetarian
Burrito
50
8.2
$3.80
$16.50
$12.70
Veal Steak
120
19.4
$6.35
$20.85
$14.50
Steak
Diane
111
17.9
$7.75
$24.75
$17.00
619
100%
77.38
12.5%
Average
OH 4-29
Total
Cost
Total
Sales
Menu
CM
Menu Engineering
Menu
Item
Number
Sold
Pop
Index %
Food
Cost
Selling
Price
Item
CM
Strip Steak
145
23.4
$7.50
$23.65
$16.15
$1087.50
Ginger
Shrimp
116
18.7
$5.20
$18.00
$12.80
$603.20
Duck
Breast
21
3.3
$7.30
$21.50
$14.20
$153.30
Lamb
Chops
11
1.8
$6.90
$22.00
$15.10
$75.90
Pork Loin
45
7.3
$6.30
$20.50
$14.20
$283.50
Vegetarian
Burrito
50
8.2
$3.80
$16.50
$12.70
$190.00
Veal Steak
120
19.4
$6.35
$20.85
$14.50
$762.00
Steak
Diane
111
17.9
$7.75
$24.75
$17.00
$860.25
619
100%
77.38
12.5%
Average
OH 4-30
Total
Cost
$4015.65
Total
Sales
Menu
CM
Menu Engineering
Menu
Item
Number
Sold
Pop
Index %
Food
Cost
Selling
Price
Item
CM
Strip Steak
145
23.4
$7.50
$23.65
$16.15
$1087.50
$3429.25
Ginger
Shrimp
116
18.7
$5.20
$18.00
$12.80
$603.20
$2088.00
Duck
Breast
21
3.3
$7.30
$21.50
$14.20
$153.30
$451.50
Lamb
Chops
11
1.8
$6.90
$22.00
$15.10
$75.90
$242.05
Pork Loin
45
7.3
$6.30
$20.50
$14.20
$283.50
$922.50
Vegetarian
Burrito
50
8.2
$3.80
$16.50
$12.70
$190.00
$825.00
Veal Steak
120
19.4
$6.35
$20.85
$14.50
$762.00
$2502.00
Steak
Diane
111
17.9
$7.75
$24.75
$17.00
$860.25
$2747.25
619
100%
$4015.65
$13207.55
77.38
12.5%
Average
OH 4-31
Total
Cost
Total
Sales
30.4%
Menu
CM
Menu Engineering
Menu
Item
Number
Sold
Pop
Index %
Food
Cost
Selling
Price
Item
CM
Strip Steak
145
23.4
$7.50
$23.65
$16.15
$1087.50
$3429.25
$2341.75
Ginger
Shrimp
116
18.7
$5.20
$18.00
$12.80
$603.20
$2088.00
$1484.80
Duck
Breast
21
3.3
$7.30
$21.50
$14.20
$153.30
$451.50
$298.20
Lamb
Chops
11
1.8
$6.90
$22.00
$15.10
$75.90
$242.05
$166.10
Pork Loin
45
7.3
$6.30
$20.50
$14.20
$283.50
$922.50
$639.00
Vegetarian
Burrito
50
8.2
$3.80
$16.50
$12.70
$190.00
$825.00
$635.00
Veal Steak
120
19.4
$6.35
$20.85
$14.50
$762.00
$2502.00
$1740.00
Steak
Diane
111
17.9
$7.75
$24.75
$17.00
$860.25
$2747.25
$1887.00
619
100%
$4015.65
$13207.55
$9191.85
77.38
12.5%
30.4%
$14.85
Average
OH 4-32
Total
Cost
Total
Sales
Menu
CM
Menu Engineering
Menu Item Pop Category CM Category
OH 4-33
Menu Item
Class
Strip Steak
H
H
Star
Ginger Shrimp
H
L
Plow Horse
Duck Breast
L
L
Dog
Lamb Chops
L
H
Puzzle
Pork Loin
L
L
Dog
Burrito
L
L
Dog
Veal Steak
H
L
Plow Horse
Steak Diane
H
H
Star
Menu Analysis
Popularity
High
Low
OH 4-34
H/L
H/H
L/L
L/H
Contribution Margin
High
Other Menu Analysis Methods
 Miller Matrix
 Same process but evaluate food cost and popularity
 Weighted food cost is factor
 Winners (similar to stars) = low food cost, high popularity
 Goal to achieve sales mix with 60% of items in low food
cost category
 Cost Margin Analysis
 Combination of Miller Matix and Contribution Analysis
 Methodology includes evaluation of popularity,
contribution margin and food cost
 Primes (similar to stars) = low cost, high contribution
OH 4-35
Menu Management Decisions
 Must consider more than just sales dollars, item
popularity, and contribution margins
 Preparation and service costs
 Restaurant’s image
 Customers’ expectations
OH 4-36
The Pareto Principle
 A few of the top selling menu items account for
a large majority of sales in a category.
 Removing the two or three least popular items in
a category will not likely reduce the total sales of
items in the category.
OH 4-37
Monitoring Menu-Related Concerns
 Three factors must be considered and
compared when analyzing food cost efficiency.
 Standard food cost percentage
 Composite food cost percentage
 Actual food cost percentage
OH 4-38
Monitoring Menu-Related Concerns continued
 Standard food cost percentage
 The expected food cost percentage based upon the
approved operating budget or other benchmark.
 Calculation
Total target
food cost
OH 4-39
÷
Total target
food sales
=
Standard food
cost percent
Monitoring Menu-Related Concerns continued
 Composite (weighted) food cost percentage
 The percentage that results from the actual
food sales
 Calculation
Actual food
Actual sales
Composite
cost for menu ÷ from menu items = food cost
items sold
sold
percent
OH 4-40
Monitoring Menu-Related Concerns continued
 Actual food cost percentage
 Reported on the restaurant’s income statement
OH 4-41
Monitoring Menu Related Concerns continued
 If the composite percentage exceeds the
standard percentage, take steps to manage
sales activity.
 If the actual food cost percentage exceeds
the composite percentage, take steps to
improve food controls.
OH 4-42
How Would You Answer
the Following Questions?
1.
2.
3.
A composite food cost percentage is a
(weighted/unweighted) average.
A menu product mix spreadsheet is designed to
identify a restaurant’s composite food cost
percentage. (True/False)
The menu pricing method that considers target profit
in its computation is the
A.
B.
C.
D.
4.
OH 4-43
Factor method
Markup on cost method
Texas Restaurant Association (TRA) method
Yield percent method
Product mix has very little impact on the ability of a
restaurant to achieve its standard food cost
percentage. (True/False)
Key Term Review
 Composite food cost percentage
 Factor method
 Markup
 Markup differentiation
 Markup on cost method
OH 4-44
Key Term Review continued
 Menu engineering
 Menu product mix
 Price-value relationship
 Pro forma income statement
 Texas Restaurant Association (TRA) markup
method
OH 4-45
Chapter Learning Objectives—
What Did You Learn?
 Determine a selling price based on various
markup methods.
 Explain how market forces affect menu prices.
 Explain how the menu product mix is used to
determine the composite food cost of a menu.
 Explain how the menu helps with food cost
control.
OH 4-46