24 Controlling Costs in Foodservice
Contribution Margin Method
When the contribution margin method is used to determine a menu item’s selling
price, factors in addition to its food cost are considered. The contribution margin of a
menu item is the dollar amount remaining after the variable costs are subtracted from
the selling price.
Selling Price – Variable Costs = Contribution Margin
Variable costs are those expenses that increase or decrease as the activity of a
business increases or decreases. In the foodservice industry, variable costs include the
costs of
• products—including food—that are used to produce a menu item
• labor expenses that increase and decrease with an operation’s activity level
• materials and other supplies used in an operation’s production and service areas
Fixed costs are expenses that do not change in proportion to the activity of a
business. They cost the same amount regardless of the level of sales. Fixed costs include
the expenses of
• rent
• insurance premiums
• property taxes
• management salaries
Semi-variable costs have elements of both fi xed and variable costs.
When the contribution margin method is used, food cost, as well as everything else
that is needed to produce and sell the menu item, is taken into consideration. The price
chosen for the menu item must be high enough to make a contribution to the profi t of
the operation. It must also assist in covering the overhead of the operation. Put
another way, the contribution margin is the amount available to pay for fi xed costs and
provide for any profi t after variable costs have been paid. The higher the contribution
margin, the more profi t the operation will make. The desired contribution margin comes
from the manager’s assessment of the potential sales for the operation, fi xed costs that
must be paid, and the costs of items such as china and supplies.
Using the contribution margin method to determine the selling price of a menu
item, an operator adds the desired contribution margin to the product cost.
Product Cost + Desired Contribution Margin = Selling Price
For example, the variable cost calculation for a menu item called the “Mexican
Hamburger” is shown in 2-2. The operator selling the Mexican hamburgers would
need to price the hamburger at a level that
• recovers the $2.69 in variable costs to produce the hamburger
• contributes an appropriate amount for the operation’s fi xed costs
• makes a profi t
Prime Cost Method
The prime cost method is similar to the food cost percentage method because it
uses the cost of food in the calculation. However, it also includes the expenses of wages,
employee benefi ts, and payroll taxes.
Prime Cost = Food Cost + Wages + Employee Benefi ts and Payroll Taxes
Returning to the example of the Mexican hamburger, the prime cost of the item
is the cost of the recipe, plus the cost of the staff’s time, and the cost of the benefi ts
and payroll taxes paid. If the payroll cost to prepare, serve, and clean up after this dish