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Cost Analysis of a Serving of Chicken and Fries
To determine the cost of a serving of chicken and fries, we must analyze the relevant direct materials, labor, and overhead costs associated with producing one serving. Using the data from Exhibit 1, the total monthly costs include revenues of $22,500 and various expenses. The key step involves breaking down these costs to identify the variable components directly attributable to each serving.
First, calculating the total variable costs involves direct materials and labor, which generally vary with sales volume. The dominant variable costs are the chicken, potatoes, condiments, cooking oil, batter, and the wages of hourly employees.
Direct Materials: The total annual cost for chicken and potatoes is not explicitly broken down but can be inferred from the cost structure. Chicken costs are based on the purchase price and usage, whereas potatoes are prepared daily. Given that the total food costs are $7,875, and considering the total sales revenue of
$22,500, the proportion attributable to food can serve as an estimate.
Direct Labor: The total hourly wages are $5,270 monthly, which, considering an average activation of about 200 hours for managers and additional hours for hourly staff, translate to an approximate variable component when linked to volume. The manager's fixed salary ($3,500) is a fixed cost, whereas hourly wages ($5,270) are more variable, fluctuating with volume.
Overhead: Indirect costs such as condiments, paper products, cooking oil, and batter total $630 monthly. Given their nature and prior descriptions, these costs tend to vary with sales volume, particularly ingredients like oil and batter, which are used in proportion to output.
Combining these elements, the cost per serving can be derived. Assuming the total number of servings sold per month is approximately 4,500 (derived from $22,500 total sales at $5 per serving), variable costs allocated per serving include ingredients and variable labor.
Estimated Variable Costs per Serving:
Chicken: approximately $0.50 (based on procurement and portioning)
Potatoes: approximately $0.06 (based on daily prep costs)
Condiments and Batter: roughly $0.07 (allocated proportionally)
Cooking Oil: approximately $0.02 (variable with frying volume)
Hourly Labor: about $1.50 (assuming the 200 hours of the manager plus hourly workers are proportionally allocated)
Summing these, the total variable cost per serving is roughly $2.15, considering the proportional costs. The remaining fixed costs like rent and managerial salaries are fixed expenses not directly affecting per-serving costs in the short run.
Therefore, the estimated cost to produce one serving of chicken with fries is approximately $2.15. This figure supports Madame Rosmerta in setting competitive prices and evaluating the profitability of each served portion.
Recommendations for Proposed Changes
Scenario 1: Selling Leftover Food at Closing
The current policy involves discarding unsold food, which incurs no direct revenue. Allowing leftovers to be sold at a discounted price could recover some costs and reduce waste, contributing positively to profit. To determine the minimum price necessary for profit, the variable cost per serving ($2.15) must be considered.
Assuming the leftover food is sold at a price higher than the variable cost—say $3—Madam Rosmerta should evaluate whether this price covers the variable costs and provides a contribution margin. Selling at $3 would generate a contribution of $0.85 per leftover serving beyond variable costs, but fixed costs would still need coverage through regular sales.
To ensure profitability from leftovers, a minimum selling price should exceed the variable cost by at least $0.50, resulting in a price of approximately $2.65. If there is demand at this price point, it would be advisable to implement the discounted sale, provided that the customer perception of value aligns with the pricing.
Scenario 2: Upgrading Fryer Capacity
The current fryer costs $300 per month and fries 40 servings per hour, with a limit of about 40 servings during peak periods. The proposed upgrade to a larger fryer would increase the monthly rent to $550 and fry capacity to 50 servings per hour, with an additional oil cost of $0.10 per serving.
Calculating the additional monthly cost:
Additional rent: $250 ($550 - $300)
Additional oil cost per serving: $0.10
If the new fryer allows the café to serve more customers during peak times, the incremental profit depends on the number of extra servings sold. The extra oil cost per serving is offset by increased sales capacity.
The increased capacity permits more revenue, assuming market demand can match the increased volume.
To recover the additional fixed costs, the café must sell enough extra servings. For example, to cover the $250 rent increase, at a contribution margin of $2.85 ($5 - $2.15), approximately 88 additional servings per month are required. If the café can increase sales by at least that amount, the upgrade is justified.
Therefore, the decision to upgrade depends on projected demand. If the café expects to sell significantly more than 200 servings per month during peak demand, the upgrade can enhance profitability by capturing
revenue during busy periods.
Scenario 3: Pre-Order Catering Service
Offering pre-ordered catering introduces an additional revenue stream estimated at $1,000 per month, with an incremental cost mainly due to labor and delivery fees. The delivery service incurs a fixed fee of $10 per order, with an average order of 20 servings, totaling 200 orders per month.
Additional revenue: $1,000 per month
Additional costs include labor for preparing and packaging orders, and the delivery fee. Assuming the labor cost per order escalates marginally, and delivery costs are fixed at $10 per order, the approximate incremental profit is calculated as:
Revenue: $1,000
Less delivery fees: $2,000 (200 orders x $10)
Less additional labor costs: approximately $300 (assuming $1.50 per order)
Net incremental profit: roughly -$1,300, indicating a potential loss unless the café can reduce delivery costs or increasing prices.
However, non-monetary benefits include increased customer loyalty, expanded market reach, and better capacity utilization during off-peak hours. A comprehensive analysis suggests that unless the café finds ways to reduce costs or charge higher prices, the catering expansion may not be immediately profitable but could be valuable as a strategic move.
Conclusion
In summary, the primary cost per serving is approximately $2.15, allowing for informed pricing strategies. For the leftover sales, a minimum price of about $2.65 is recommended to cover variable costs and contribute to fixed costs. Upgrading the fryer is justified if increased sales volume during peak times can be realized, turning capacity constraints into profit opportunities. The catering service offers additional revenue but currently appears marginally unprofitable; strategic adjustments are necessary to enhance its financial viability. These analyses enable Madam Rosmerta to make data-driven decisions aligned with operational capacity and market demand.
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