Food Cost as a Percentage of Selling Price
When talking about food cost percentage in relation to your selling price, we first need to understand what this number actually represents and why it is so important. Imagine what would happen if you didn't lock your storeroom at night or your walk-in coolers and you left the front door of your operation wide open.
We use locks as a means of control to keep from losing money. So think of this number/percentage as another control that you use to keep from losing money and maximize your profits.
Food cost in the selling price represents the percentage that the expense of the raw cost makes up in the selling price. It does not represent how much profit is made, though it does directly impact profit. The lower the food cost percentage, the higher the return on investment or greater the contribution. The higher the food cost percentage, the lower the return on investment or lower the contribution.
The Make Up of Selling Cost
Raw Cost makes up 31% of total Selling Price of $10.50
Chicken Breast - $ 1.54
Tomato Caper Relish - $ .54
Asparagus - $ .66
Rice Pilaf - $ .55
Total Raw Cost $ 3.29
Raw Cost ÷ Selling Cost = Food Cost %
$ 3.29 ÷ $ 10.50 = .3133 or 31%
To Achieve a Target Food Cost (TFC) %
Raw Cost ÷ (TFC) decimal = Selling cost
$ 3.29 ÷ .31 = $ 10.61.
The $ .10 variance in selling price is due to the number of decimal places used in the target food cost percentage
Let's Take a Look
Let’s look at a simple example. You are preparing a wonderful new grilled chicken dish as a special that evening and you determine that it cost you $3.29 to make the dish. The dish includes a 5 oz boneless chicken breast with 2.5 oz of tomato-caper relish, 3.5 oz of Grilled Asparagus and 3 oz Saffron Rice Pilaf. Not wanting to overcharge your guest; you feel that $10.50 is a fair market price for this dish. Not bad you think; you have a contribution margin of $7.21 on each dish sold.
Looking at your food cost, which is calculated by raw cost or cost to produce the dish divided by the selling cost, you will see that this dish has a food cost percentage of 31% or to better explain, your raw product cost makes up 31% of the selling price.
If you have a desired food cost percentage that you want to achieve and want to calculate the selling price, you would use the formula,
Raw Cost divided by the Target Food Cost percentage as a decimal.
If you round the decimal instead of carrying it out the total number of places the number extends. you will see a slight variance in price than if you use the raw cost divided by selling cost.
Food Cost Standards
By understanding what the food cost percentage in the selling price is and how it relates to the bottom-line, you can better control your profit margins and ensure that profits are maximized.
While there is some degree of industry standards for target food cost percentage, every operation will have different needs and different target food cost requirements based on overhead cost of the operation. Additionally, some operations can demand a higher selling price; meaning a lower food cost percentage, while others will need to take a more moderate approach to their pricing.
Review in the Menu-Costing page to learn how our target food cost percentage for our operation will be used to determine a selling price and how the food cost percentage may vary from product or dish offered. Remember, the lower the food cost % the greater the return on investment.