Costing and Selling Prices

At this stage we are going to stop our discussion about product development and spend a bit of time explaining how to calculate food cost and selling prices. Understanding costing and how to calculate selling prices is important if you want to make a profit.

Understanding costs

One mistake often made is to think that you are going to make a profit on a new product without doing a proper costing: using a competitor’s price or just making up a selling price. The problem with this is your costs include the cost of ingredients, labour, electricity, water, rental and so on and your competitors costs are different from yours. Understanding your costs is one of the most important aspects to setting prices, too high and it will not be market related and the customer will not buy it too low, and you will end up making a loss.

Most companies who develop products know what their desired profit ratios are and so they use this to cost product and set selling prices. If the cost of the product is more than it should be then they may not even launch the product because it will bite into their profits. There is, however, a marketing concept called a ‘lost leader’, this is a popular product that makes very little profit but is kept because it attracts customers to a business, however customers also buy other products.

In costing, the first important concept is to understand a breakdown of your costs. The diagram below shows a breakdown of a selling price.

Gross profit is the full earnings gained after deducting the direct costs of the ingredients.

Net profit is the actual gain after all expenses have been deducted.

Let’s take an example to explain the diagram:

If the dish sells for 45.00

and the raw materials cost 20.00

then the gross profit is 45.00 – 20.00 = 25.00

To calculate the gross profit percentage, you would do the following:

[frac{25.00}{45.00 times 100} = 55.5%]

Working out your food cost

The food cost percent is the difference between the gross profit and 100% (i.e., 100% – 55.5% = 44.5%), which gives a food cost percentage of 44.5% of the sales. So, the selling price minus the cost of food equals the gross profit. And the gross profit minus the fixed and variable costs equals the net profit.

Managing food costs

Some of the ways we manage food costs are as follows:

Standardised Recipes – A standardized recipe controls both the quantity and quality of what the kitchen will produce. It consists of the procedures to be used in preparing (and serving) each product or menu item. A standardized recipe is the key to product consistency, and operational success.

Portion Control -The desired weight of each portion must be calculated. For example, if you need to trim food, cooking loss must all be factored in. Sticking with raw and cooked weights is crucial for achieving the desired food cost.

Portion Guides – The serving size must form part of the standard recipe and provide a guide, either by weight, number of items, a measure full or a cooked weight.

Sourcing and Purchasing Food Commodities – The ability to source and purchase food at the best possible price and quality. Most catering operations now spend time planning around sustainable food practices and thus plan products and menus from products that can be sourced locally and seasonally to allow for best possible price.

Although nowadays many items are available all they round their high import cost will affect the profit of a product or dish. This must be considered when costing products.

Quality of Food Produce – Most chefs and business owners will focus on the quality of the raw product that they use. Customers are increasing aware of quality in food produce and expect the best quality.

Yield – The yield is the number of portions that is obtained from one recipe. Over portioning can affect the cost of a product or dish so it is important that the standardised recipe should indicate the yield and portions that it produced.

Wastage Control – There are many items that contribute to wastage, pilferage (theft), over ordering which in turn means the produce goes off, using stock rotation systems properly benefits the waste control.

Catering operations are now focussing on waste especially in large scale operations where apps and business intelligence gives the manager statistics on how much is wasted.

Calculating a selling price

Remember that the selling price should include the cost of sales (the direct costs of the product) as well as the indirect costs such as labour, electricity, rent and so on.

Usually, we calculate a selling price to achieve a set food cost percentage, because we will know the contribution of our indirect costs as well as the percentage profit we wish to make.

First calculate the portion cost

1. Calculate the cost of the recipe by costing each ingredient.
2. Calculate the cost per portion using the following formula:

For example: The total cost of a given product is $235.00 and you are yielding 8 portions per recipe. The cost per portion calculation is as follows:

[text{cost per portion} = frac{$235.00}{8} = $29.37]

Second: Calculate the selling price per portion

The cost per portion is then used to calculate the selling prices based on a desired food cost percentage.

For example: We have determined that the cost per portion is $29.37 and the food cost percentage that we want is 25% (0.25 as a decimal).

The selling price would then be calculated as follows:

Test your costing skills

Test your costing skills by calculating the following, the answers are below the questions:

1. If your recipe costs you $100.00 to make and it yields 5 portions, how much does each portion cost?
2. If you sell each portion for $30.00, what is your food cost percentage?
3. If you want to sell that product a product costs $15 to produce, what would the selling price be, and you want to achieve a 65% gross profit put another way a 35% food cost?

Answers to questions

1. $20
2. 66.66% – 20/30 x 100/1 = 66.66%
3. $42.85