ANFP Practice Standards: Determining Menu Item Prices

Last Updated July/August 2011

Standard

The certified dietary manager (CDM) assures that pricing menu items will maximize profits or maintain a break-even balance between costs and the foodservice department budget.

Criteria

1.1 Raw food cost per menu item is determined using one of the following methods:

• Portion Cost Method for menu items of multiple ingredients (such as a casserole): This method is based on the belief that standardized recipes are used and followed. The raw food cost of each menu item ingredient is added together and divided by the number of servings. Computer software can assist in this method.
• Raw food cost for single ingredient menu items (such as a portion of fish): Using either a physical inventory or a computerized inventory, determine the individual product cost by dividing the total inventory cost by the number of units in the inventory. The individual cost can also be determined by dividing the case price by the number of units in a case.
• Raw food cost for portions with a cooking or trim loss (such as whole pieces of meat or fresh vegetables like broccoli, cauliflower, potatoes, or asparagus): Determine your as purchased (AP) price per ounce by dividing the purchase price by the purchase weight and then by 16. (Example: 15 lbs of roast beef for $56.85) Divide $56.85 by 15 lbs to find the cost per pound; then divide by 16 to find the cost per ounce = $0.237 per ounce. This is the as purchased price per ounce. To determine the edible portion (EP) price, divide the as purchased price by the yield percentage. Use a reference such as Food for Fifty* and locate the chart that shows the yield percentage for most common food items. (According to Food for Fifty, the yield percentage for beef rump roast is 0.62.) Divide the as purchased price per ounce by the yield percentage to determine the cost per ounce for edible portion ($0.237 divided by 0.62 = $0.38 per ounce of edible portion). Then multiply that by the number of ounces in your portion size to determine the raw food cost per portion ($0.38 x 4 ounce portion = $1.52). (Note: If you don’t take into account your cooking or trim loss, you will lose money when determining the menu item cost. In the example above, the as purchased raw food cost would have been $0.95 per portion. When taking the cooking loss into account (EP), that increased the price per portion to $1.52.)

1.2 Determine the menu item selling price by using one of the following methods:

• Adding Contribution Margin to Menu Item Costs: This method takes into account both the raw food cost and the contribution of other costs of running a foodservice department, including labor and overhead. Determine the contribution margin required to cover costs other than food by using Method A or Method B, outlined later.
• Cost Percent Method: Determine what percentage your food cost is of your “sales” by using this method, outlined later.

1.3 Menu item selling prices may be adjusted downward for staff or frequent visitors.

1.4 Monitor menu item sales after prices have been accurately determined in order to predict items that are price sensitive. Menu item sales that decrease based on an increase in price are price sensitive and the menu item price may need to be adjusted downward for greater sales.

1.5 CDM continues to monitor prices and sales in order to maximize profits or balance costs with the department budget.

1.6 CDM adjusts their cost percent to better reflect costs.

1.7 CDM compares their menu item prices to their competitors' to remain competitive.

Assessment

1.1 CDM prepares a written procedure to determine menu item costs using either the Contribution Margin or Cost Percent method.

1.2 CDM changes menu item prices based on monitoring food costs.

1.3 CDM designates an employee trained in these procedures to act in their absence.

Adding Contribution Margin to Portion Costs

Method A

Note: This method is revised for healthcare facilities that do not use/have “sales dollars.” While this is not as accurate as Method B, it allows the manager to set portion costs that reflect both the cost of food and other departmental costs.

1. Determine foodservice department budget.
2. Subtract from that budget the monthly cost of food.
3. This equals total costs other than food.
4. Determine total clients (customers).
5. Determine number of meals served (clients/customers X number of meals per day X days in the month).
6. Divide line 3 (total costs other than food) by line 5 (the number of meals served).
7. Determine raw portion cost.
8. Add the amount from line 6 to each portion food cost (line 7) to determine menu item selling price.

Example: Method A

1. Department budget for one month: $49,000
2. Food costs (includes staples) for that month: $22,500
3. Total costs other than food: $26,500
4. Determine total number of meals served:100 clients x 3 meals/day x 30 days in the month = 9000 meals
5. Divide total costs by number of meals served: $26,500÷9000=$2.94
6. Add $2.94 to each portion raw food cost to set the selling price per portion.
7. Raw food cost = $2.56 + $2.94 = selling price: $5.50

Example: Method B

1. Department sales for one month: $49,250
2. Total cost of sales (includes food, labor,): $46,917
3. Gross profit = $ 2,333
4. Total number of customers (based on the cash register count): 1000
5. Total contribution of costs to sale ÷ customers = $2.33
6. Add $2.33 to each portion raw food cost to set selling price per portion.
7. Raw food cost: $2.56 + $2.33 = selling price $4.89 or $5

Cost Percent Method

Method C

1. Determine a desired cost to sales ratio (cost percent). A common goal in the industry is 35-50 percent, depending upon the menu. An upscale menu would mean a higher food cost percent; a menu that contains many pre-prepared items has a higher food cost percent. A menu that is labor intensive has a lower food cost percent but a higher labor cost percent. If a desired food cost percent is 38 percent, that is the same as saying that the cost of food has been $.38 per dollar sale. To calculate your monthly food cost percent, divide your monthly food cost by total sales. If your facility doesn’t determine sales dollars, you might say that 38 percent is the same as $.38 per budget dollar.
2. Divide the portion cost of the food by the food cost percent.
3. Adjust the resulting figure to a suitable amount.

Example: Method C

1. Desired food cost percent: 40%
2. Raw food portion cost = $2.56
3. Divide 2.56 by 0.40 = $6.40
4. Round selling price to $6.50

Note: Some facilities use a multiplier to calculate raw food cost such as multiplying raw food cost by 2.5 or 3. When you multiply raw food cost by 2.5, that is the same as using a 40 percent food cost. If you multiply raw food cost by 3, that is the same as a 33 percent food cost. The more current, preferred method is using food cost percent, not a multiplier.

Summing It Up

So there they are – Standards for Determining Menu Item Prices. We hope this information will lead you on the path to more efficient and effective operation of your foodservice department.

by Susan Davis Allen, MS, RD, CHE
Susan Davis Allen, MS, RD, CHE originally wrote this standard in 2003. It was updated in April 2011 by Becky Rude, MS, RD, CDM, CFPP. Allen is an advisor to the Certifying Board for Dietary Managers. Rude serves as chair of that board.