cost-volume-profit relationships
DESCRIPTION
COST-VOLUME-PROFIT RELATIONSHIPS. Variable Costs, Variable Rates Fixed Costs, Profit Contribution Margin/Rate Break Even Point Determining Selling Price & Product Mix Applying Formulas. COST-VOLUME-PROFIT RELATIONSHIPS. Variable Costs—Costs that vary with Volume COG - PowerPoint PPT PresentationTRANSCRIPT
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COST-VOLUME-PROFIT RELATIONSHIPS
Variable Costs, Variable RatesFixed Costs, ProfitContribution Margin/RateBreak Even PointDetermining Selling Price & Product MixApplying Formulas
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COST-VOLUME-PROFIT RELATIONSHIPS
Variable Costs—Costs that vary with Volume
COGLabor—Hourly Wages and BenefitsSupplies—Cleaning, Napkins, etc.
Contribution Margin—Fixed costs and Profit generated by sales
Sales=SFixed Costs=FCVariable Costs=VCProfit=P
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FORMULAS:
S=VC+(FC+P)S=VC+CM
VC=S-CM
VC=S-(FC+P)CM=S-VCFC+P=S-VC
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Using the Formulas
-To create the Operating Budget or to Forecast -Profitability Analysis -Calculate Breakeven (0 profit position) -Determine how much can be spend on variables if
management has predetermined the fixed costs and desired profit.
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Variable Rate (VR)=VC/Total Sales
-The % of sales used to pay for variable costs (i.e.
food and beverage costs and variable labor)
Contribution Rate (CR)=CM/Total Sales -The % of sales available to pay for fixed costs and
profit
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Break Even Point
The point at which you will pay all expenses, but generate no profit
BE=$FC/%CR Break Even=Fixed Costs/Contribution Rate
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FORMULAS
$VC / S = VR(%)
$CM/ S = CR(%)
VR + CR = 1
S = FC + P / CR
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SALES FORECASTINGSALES = FIXED COST + PROFIT / CONTRIBUTION MARGINUNIT SALES = FC + PROFIT/AVG. CHECK – AVERAGE VC
.SALES IN UNITS AVG. CHECK AVG. VC FIXED COST PROFIT
$14.00 $4.00 $1,000.00 $0.00
$19.00 $4.00 $1,800.00 $0.00
$11.00 $3.00 $6,000.00 $3,000.00
$17.00 $6.00 $18,000.00 $0.00
$16.00 $8.00 $23,000.00 $0.00
$14.00 $7.00 $29,000.00 $1,000.00
$14.00 $6.00 $168,000.00 $0.00
$14.00 $3.00 $293,000.00 $0.00
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CONTRIBUTION MARGIN & RATE
.
SALES $1,800VARIABLE COSTS 800FIXED COSTS 500PROFIT 500
WHAT IS THE CONTRIBUTION MARGIN?WHAT IS THE CONTRIBUTION RATE (%)?IF FIXED COSTS INCREASED TO $800, WHAT IS THE NEW CM AND CR?IS ALES INCREASED TO $2,400, WHAT IS THE NEW CM AND CR?
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SALES FORECASTING
. SALES VC VR FC PROFIT CM CR
$5,000 $3,000 $2,000
$15,000 $10,000
$8,000 $1,000 68%
$15,000 $6,000 61%
$5,000 $3,000 $2.00
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PURCHASING, RECEIVING, STORAGE & ISSUING• PURCHASING
– TERMINOLOGY– STANDARDS– FORMS – METHODS– FORMULAS
• RECEIVING-TERMINOLOGY-STANDARDS & TECHNIQUES
• STORAGE PRINCIPLES– DIRECTS vs. STORES– ISSUING PRACTICES– INVENTORY VALUATION– AVG. INVENTORY & INVENTORY TURNOVER
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PURCHASING
Purchasing Standards are dictated by the Target Audience
-Who is the clientele?-What concept have you developed to appeal to this audience?-What will their expectations be?
Three areas of standards development:
QualityQuantityCost
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QUALITY
Product specifications:Intended UseProduct NameBrand NameGradeColorSize of ProductSize of PackageMinimum WeightRequired YieldPlace of OriginRipeness
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Purchase Specification—All specs relating to the purchase and receiving of the product
Credit TermsDelivery ScheduleSupplierAvailabilityIntended UseProduct NameBrand NameGrade
ColorSize of ProductSize of PackageMinimum WeightRequired YieldPlace of OriginRipeness
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ORDERING Par Stock (Par Level)—the point at which an item should be ordered Periodic Ordering—when routes are set and merchandise is only delivered
on that schedule
Amount Required for the Period+Safety stock-Amount on HandAmount to be Ordered (adjusted to case size
This is standard in most small restaurants where minimum orders are a
consideration, and with larger organizations what use One-Stop-Shopping and keep ordering to a minimum to reduce costs.
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PERPETUAL ORDERING
-Fluctuating order dates-Product ordered whenever the level falls below par-Orders cover what will be used until delivery and another order
can be placed
Maximum Storage Amt.-Ordering Point+Amount needed before delivery receivedAmount Needed+Safety Stock (% of Order or Specific CountAmount to Order
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PERIODIC ORDERING
• . AMT. USE BEFOREPRODUCT NEEDED O/H SAFETY% DELIVERY ORDER
PASTA 300# 30 10% 10
TOMATOES 6 CS. 6 0 20
RIB EYE 200# 200 10% 20
ICE CREAM 20 GAL. 20 0 1
SALMON 60 PCS. 30 5% 0
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Inventory
Bin Cards are used to record inventory levels as merchandise is received and issued.
Physical Inventory serves as a check of the
perpetual inventory system.
Physical inventory should be done AT LEAST once a month.
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BUYING METHODS
Open bid—Stewards Market Quotation SheetCall for bidsCan be shown to other vendors and used as leverage
Sealed bids—bids are submitted sealed and cannot be used against each other.Can be re-bid after the first roundUsed more for equipment and furniture than for food
Cost Plus—the vendor guarantees to deliver the product at their cost plus a certain
percentage profit—used frequently for produceTies you into one vendorWho determines the price?
Generally used in high volume situations as a negotiating tool to get lower prices
Co-op Buying—small operations join together--volume discounts--buy in bulk and
redistribute
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PurchasingOne-Stop-Shopping—single vendors handle a large volume of the product needed.
Meat and product may fall outside the contractU.S. Foodservice and Sysco are the major One-Stop vendors
Contracts—are frequently written for perishables and are guaranteed for a certain period of time
Ties in prices, which may then rise or drop on the active market Warehouse Buying—large warehouses; a full line of product: buyers shop supermarket style
Jetro, Restaurant Depot Standing Orders—vendors maintain stock and take returns on unused/old product
Bread, dairy Centralized Purchasing--main office sets standards; local branches purchase
No local customization for regional preferences On-Line Purchasing—specifications are sent out via web site and anyone can submit bid
Purchase Pro
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HOW MUCH PRODUCT IS NEEDED?
EP = Edible PortionAP = As Purchased%Yield = ED/AP $EP = $AP x %Yield AP = EP/%Yield
%Yield are available from several sources
-on-line product identification web sites-vendors-purchasing manuals-hands on analysis
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EP / AP = YIELDAP x YIELD = EPEP / YIELD = AP
• .
EP COST AP COST YIELD
$12.00 50%
$128.00 75%
$22.50 68%
$8.00 $16.00
$100.00 70%
$228.00 70%
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RECEIVING, STORAGE AND ISSUING
The Receiving Department is responsible for
maintaining the standards set by management. They must have copies of all standards set
Quality—Product SpecificationsQuantity—Purchase OrdersCost—Purchase Orders
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RECEIVING, STORAGE AND ISSUINGMust Haves:
Scales—weight all meats and product Thermometer—make sure food is delivered at appropriate temperatures Calculator—make sure to delete anything that is missing and subtract from
total Knife—if ripeness standards are set, cut fruit to verify Receiving Sheet—sent to Accounts Payable with all Invoices received for the
day
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RECEIVING, STORAGE AND ISSUINGFIFO—First In First Out
Date all incoming inventoryRotate stockMaintain product quality through appropriate storage; temperature, humidity
Product Temperature %Humidity Beef 34-38Poultry 28-32Fish 32-36Live Shellfish 30-40Eggs 40-45Dairy 35-41Fruit and Vegetables 34-50 85-95Freezer 0Dry Storage 70 70
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RECEIVING, STORAGE AND ISSUING
Protect inventory from theft and pilferage--System of checks and balances
Requisition FormsLimit access to storage areasHire people with history of integrity Locate storage areas in easy to secure locations
Directs—products delivered straight to their place of use; immediately
charged to the department ordering them Stores—products delivered to a warehouse area until needed; charged to
the appropriate department when requisitioned
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INVENTORY VALUATION
Physical Inventory should be done AT LEAST once a month.
Inventory high volume items more frequentlyHigh cost items may be inventoried every day
Five common types of inventory valuation:
FIFO, LIFO, Weighted Avg., Actual, Last Price
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1. FIFO—Closing inventory is calculated using the most recent prices
Orders:1/1 5 cases at $4 each1/15 4 cases at $5 each1/20 4 cases at $3 each1/29 5 cases at $4 each
Closing Inventory: 8 casesInventory: 5 cases at $4=$203 cases at $3=$9Total Value: $29.00
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2. LIFO—Closing inventory is priced using the earliest prices
Closing Inventory: 8 casesInventory: 5 cases at $4=$20
3 cases at $5=$15Total Value: $35.00
Orders:1/1 5 cases at $4 each1/15 4 cases at $5 each1/20 4 cases at $3 each1/29 5 cases at $4 each
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Inventory Valuation3. Weighted Average
Weighted Average=Total Costs/Total Units
Orders:1/1 5 cases at $4 each $201/15 4 cases at $5 each $201/20 4 cases at $3 each $121/29 5 cases at $4 each $20
Cases 18 $Total $72Weighted Avg. $4Closing Inventory= 8 cases $32
4. Actual Price Method--Each item is marked as it is stored; rarely used
5. Last Price Method--inventory is priced using the last recorded price Most accurate because it reflects “replacement cost”
8 cases @ $4 = $32
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INVENTORY TURNOVER
Inventory turnover varies by style of restaurant:
Full service 20-25/yr.Fast Food 150+/yr.Liquor 7-12/yr.
Excessively high turnover—Shortages
Customer dissatisfaction Extremely low turnover—Spoilage
Pilferage Costs--estimated @ 15% of inventory. Opportunity Costs
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Inventory Turnover = COGS/Average Inventory
COGS=O I + P – CI Average Inventory=OI +C I
2
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AVERAGE INVENTORY & TURNOVER• .
OI CI PUR. AI IT
12,000 12,000 15,00016,500 17,000 31,00022,000 23,000 45,0006,000 5,000 18,00012,380 6,380 23,00031,000 31,200 103,00015,000 14,000 93,000
AVG. INVENTORY = OI + CL /2INVENTORY TURNOVER = $COG / AI$COG = OI + PURCHASES - CI