Pricing and Cost Control

Question 1

What are 6 pricing approaches?

Answer 1

1. non structured
2. factor method
3. prime-cost method
4. actual cost method
5. gross-profit method
6. stochastic-modelling approach

Question 2

Explain the non structured approach to pricing and real costs.

Answer 2

simplest
examine competition’s price
similar price for similar item
not recommended but used often

Question 3

What is the factor method?

Answer 3

aka fixed factor

• based on food cost
• calculation method:
  a) calculate food cost of recipe
  b) calculate factor: 100/x (x=food% from budget or other)
• multiply food cost by factor

eg. 100/25 = 4 -> factor
food cost: 0.43
selling price: 0.43*4 = 1.72

Question 4

What is the fixed factor for subsidized operations?

Answer 4

food% = 40%
factor= 2.50

Question 5

What are advantages and disadvantages of the factor method?

Answer 5

advantages: simple math
dis:
- real food cost known at end of a period = delay between start of operation and cost determination-factor is applied regardless whether it needs labor (uniform markup)
- disregards perception of value (is it worth it?)

Question 6

What is the prime cost method?

Answer 6

add cost of food and labour and multiply by the markup percentage to get final price

Question 7

What are (dis)advantages of prime cost method?

Answer 7

adv: markup determined by management
dis: requires accurate cost of food records, cost of labour (very hard), represents a huge task when menus are extensive (many options)

Question 8

What is the actual-cost method?

Answer 8

aka Recovery plus profit method

EP cost (edible portion) +

• labour costs
• variable cost (for hygiene items/paper…)
• fixed costs (to cover rent, power, franchise..)
• profit margin

How is it done?

1. labour cost + EP cost = 66% (based on previous financial reports)
2. variable coss + fixed costs + profit = 34%
3. if labour costs +EP costs = 66% or $4.85 then $4.85/66% = $7.35

Question 9

What are advantages and disadvantages of actual-cost method?

Answer 9

adv: includes all costs, markup determined by management
dis: requires accurate cost records, time needed to collect data and do calculations

Question 10

What is the gross-profit method?

Answer 10

determines specific amount of money that should be made on the basis of number guests served

• previous experiences
• cannot account for last minute variations nor should it count on temporary variations
• not common

Question 11

Describe the stochastic-modeling approach.

Answer 11

the only method to integrate all internal and external variables
rarely used because complex

Question 12

What are factors that affect real costs?

Answer 12

• test kitchens
• purchasing (seasonal changes/trends, poor inventory management, last minute orders=more expensive)
• at production (sloppy standardization procedures, recipes not followed, uncontrolled production, food left in preparation pans)
• distribution/service (holding shrinkage/evaporation, spills, meals refused and substitutes, poor portion control, non adaptation to changes in customer rates)
• storage (spoilage due to inadequate temperature control/dating, equipment failure, inaccuracy in costing /bad yield)
• quality assurance activities(dummy trays/taste panels)
• theft