Foundations of cost control by daniel traster chapter13

chapter 13 Revenue Management Class Name Instructor Name Date, Semester Foundations of Cost Control Daniel Traster Fixed and Variable Costs -Fixed costs not change as sales change -Variable costs change with sales fluctuations, but their percent of sales should remain roughly the same Variable Rate Variable Rate is the percent of sales that go toward covering variable costs It is an average over time, since the rate changes slightly from month to month Variable Costs Variable Rate= Sales Variable Rate Graphic VC VR x Sales VC = Variable Costs; VR = Variable Rate Contribution Rate Contribution Rate is percent of sales that covers fixed costs and percent; it is everything left after variable costs are taken out Contribution Rate = – Variable Rate • Since CR and VR are expressed in decimals, they add up to (equivalent to 100%) • Similar concept to food cost percent and contribution margin, but applied over all sales for a longer period of time Example 13a Business has monthly variable costs of $28,900, fixed costs of $22,400 and profit of $800 Calculate total sales dollars, variable rate, and contribution rate 1) Sales = Variable Cost + Fixed Cost + Profit = $28,900 + $22,400 + $800 = $52,100 2) VR = VC ÷ Sales = $28,900 ÷ $52,100 = 0.555 3) CR = – VR = – 0.555 = 0.445 Predicting Profit When only variable rate is known (not variable costs), use the variable rate graphic to calculate variable costs, then… Example 13b Restaurant has VR of 0.555 and FC of $22,400 Calculate profits if sales are $70,000 1) Variable Cost = Variable Rate X Sales = 0.555 X $70,000 = $38,850 2) Profit = Sales – Variable Costs – Fixed Costs = $70,000 - $38,850 - $22,400 = $8,750 Correcting a Loss When a business operates at a loss, it is not earning enough to cover fixed costs To correct this problem: A) Increase contribution rate by raising prices or cutting variable costs B) Increase Sales Volume Table 13.1: Profit Changes as VR and Sales Change Sales Var Rate Cont Rate Fixed Cost Var Cost Profit $150,000 0.741 0.259 $47,000 $111,150 ($8,150) $150,000 0641 0.359 $47,000 $96,150 $6,850 $150,000 0541 0.459 $47,000 $81,150 $21,850 $150,000 0.741 0.259 $47,000 $111,150 ($8,150) $175,000 0.741 0.259 $47,000 $129,675 (1,675) $200,000 0.741 0.259 $47,000 $148,200 $4,800 10 Example 13h Manager estimates that keeping the bar open an extra hour, he can bring in an extra $127 in drink sales Beverage cost is 23.5% To remain open, manager must spend another $36 in labor and $47 in utilities and other fixed costs What is the break-even point for this extra hour? FC BEP = = 1- VR $36 + $47 1- 0.235 = $108.50 in sales 29 Example 13h (cont.) If management gets $127 in sales, how much profit would it make? Variable Cost = $127 (sales) X 0.235 (VR) = $29.85 Profit = $127 (sales) - $29.85 (VC) – ($36+$47) (FC) = $14.15 30 Marketing: ways to increase revenue Market Development Product Development Market Penetration Diversification 31 External Marketing Market outside the walls of the business to bring in new customers • Advertising • Public Relations or PR • Signage • Internet Exposure 32 Internal Marketing Market to the current customer base • Menu • Electronic Communication • Loyalty Programs • Servers • Food and Drink Presentation 33 Server Marketing Techniques 34 POS Systems and Technology POS systems are ordered with various levels of software (at corresponding costs), so management must decide which functions is wants the POS to and which the employees/managers will by hand or on another computer system 35 How Technology Drives Revenue POS Increases service speed and maximize customer flow, by: • Recommending reservation counts • Forecasting wait times • Alerting management of a delay in customer service • Vibrating pagers keep servers on floor instead of in kitchen • Pagers or cell phone calls keep waiting guests comfortable outside waiting area • Hand-held devices process credit cards at36 How Technology Drives Revenue POS Increases service speed and maximize customer flow, by: • Screens in kitchen connect to POS to track orders and highlight delays • Mobile phone apps allow guests to create and settle tab without a server • Guests can place an order for take-out without going through a person • POS creates menu mix reports for any time period 37 How Technology Drives Revenue POS Increases service speed and maximize customer flow, by: • Tracks business volume and item sales in real time, so manager can make immediate decisions to push certain items • Can store guest personal information and buying patterns, which helps with service, targeted marketing, and loyalty building • Technology must support the company’s brand 38 How Technology Controls Costs POS helps control costs by: • Forecasting in 15-minute increments and recommend employee schedule to match customer flow • Serving as company’s time clock • Tracking employee vacation and schedule requests • Requiring all food ordered to be assigned to an account and employee, so theft is difficult • With recipes, POS can use menu mix and 39 forecasts to adjust recipe yields and generate How Technology Controls Costs POS helps control costs by: •With ingredient costs and recipes entered, POS can track standard food cost and theoretical inventory in real time and recommend food orders •(Physical inventory must still be taken to check on theft and waste) •POS can notify managers of employees with large number of voids, no sales, or other errors •POS is a cash register and can notify manager 40 when to empty till or get change How Technology Controls Costs POS helps control costs by: •POS records server tips for proper tip payment and income tax records •POS can create data reports for most management functions – labor cost, food cost, expense percents, average check, etc •For multi-property businesses, POS can compare data reports across units or compile a single report for all units 41 Why Learn the Non-Electronic Systems at All • Each POS function requires additional purchase cost • Some functions require extensive employee data input for them to work at all • Working by hand or on a standard computer may be more cost-effective • Managers must keep working when the power goes out 42 Why Learn the Non-Electronic Systems at All • Managers must understand all of the system data and calculations to know how to use them in making management decisions • POS only gives information; managers must interpret it and make decisions from it and from other non-POS information • POS only does what it is programmed to do; manager must be able to give it the right information for it to work effectively 43 ... generate a profit with a given variable rate and fixed cost • It is easier to generate profit by controlling costs than by increasing sales, but costs can only be cut so far Cost/ Volume/Profit Analysis... food cost percent and contribution margin, but applied over all sales for a longer period of time Example 13a Business has monthly variable costs of $28,900, fixed costs of $22,400 and profit of. .. contribution rate by raising prices or cutting variable costs B) Increase Sales Volume Table 13.1: Profit Changes as VR and Sales Change Sales Var Rate Cont Rate Fixed Cost Var Cost Profit $150,000