Hospitality Industry Managerial Accounting

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Hospitality Industry Managerial Accounting

• HRT 374
• Don St. Hilaire/Dr. Lea Dopson

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Todays Class

• Discuss Key points from Chapter 8 Cost Approaches
  to Pricing
• Discuss Key points of Goal Value Analysis
• Discuss Problems 8.1, 8.2, 8.5, 8.8
• Discuss Goal Value Homework Problem

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Chapter 8 Cost Approaches to Pricing

• Explain the importance of pricing decisions made
  by hospitality managers.
• High prices may reduce demand.
• Low prices may fail to cover costs.

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Chapter 8 Price Elasticity

• Define what is meant by the price elasticity of
  demand.
• Measures sensitivity of demand to price changes.
• change in quantity demanded divided by
  change in price.

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Chapter 8 Price Elasticity

• Elastic demand. demand is sensitive to price
  changes. Demand is elastic where competition is
  high due to presence of many operations and where
  products/services are fairly standardized
  (generally, quick-service restaurants, medium-and
  low-priced hotels/motels.)

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Chapter 8 Price Elasticity

• Inelastic demand demand is inelastic where
  competition is low or nonexistent or where an
  operation has greatly differentiated its
  products/services (generally, some resorts,
  clubs, high-average restaurants)
• Desirability of inelastic demand.

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Chapter 8 Informal Approaches

• Describe informal approaches to pricing and
  identify factors that modify cost approaches to
  pricing.
• Competitive pricing.
• Intuitive pricing.
• Psychological pricing.
• Trial and error.
• All fail to consider costs.

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Chapter 8 Cost Approaches

• Identify 4 factors that modify cost approaches
  to pricing.
• Prices charged in the past.
• Guests perceptions of value.
• Prices charged by competition
• Price rounding.

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Chapter 8 Ingredient Prime Ingredient Approach

• Describe the ingredient and the prime ingredient
  mark-up approaches to pricing.
• Determine ingredient costs.
• Determine multiple, based on desired food cost
  percentage.
• Multiply ingredient costs by multiple.
• Reasonable price in market context.

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Chapter 8 1 per 1,000 Approach

• Apply the 1 per 1,000 approach to pricing
  rooms.
• Focuses on project cost when setting prices.
  Sets price of a room at 1 for each 1,000 of
  project cost per room.
• Fails to consider current value of facilities.

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Chapter 8 Hubbart Formula

• Apply the Hubbart Formula for pricing.
• Bottom-up approach.
• Similar approach used for FB.

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Chapter 8 Yield Management

• Discuss the concept of yield management.
• Sell rooms to maximize total revenues.
• Avoid selling at lower rates when unnecessary.

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Chapter 8 Food Sales Mix and Gross Profit

• Explain the usefulness of looking at food sales
  mix and gross profit instead of food cost
  percentage when evaluating restaurant operations.
• Lowest food cost , may not have highest gross
  profit.

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Chapter 8 Menu Engineering

• Explain the menu engineering approach to pricing
  menu items.
• Considers menu item contribution margin and
  popularity.
• Stars, plow horses, puzzles, dogs.
• Menu engineering worksheet.
• Alternative approaches to menu engineering.

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Ch. 8 Cost Approaches to Pricing - Menu Analysis

• Involves marketing, sociology, psychology and
  emotions.
• Guest response may involve menu layout,
  placement of the item, description of the item,
  pricing and popularity.
• Importance of understanding how the menu works.
• Financial analysis is only one component

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Ch. 8 Cost Approaches to Pricing - Financial
Analysis

• Financial analysis of the menu usually looks at
  one or more of the following variables
• Food cost percentage.
• Popularity
• Contribution margin
• Selling price
• Variable expense
• Fixed expense

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Ch. 8 Cost Approaches to Pricing

• Five Popular Analytical Approaches
• Miller
• Kasavana Smith
• Pavesic
• Hayes Huffman
• Bayou Bennett

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Ch. 8 Menu Analysis - Miller

• 1980- Food Cost Popularity
• Matrix analysis - divide items into four
  categories
• Best menu items (winners)had the lowest food
  cost and highest popularity
• Goal is to minimize overall food cost
• Uses Average Sales
• Caution - lowest food cost items may not
  contribute the greatest gross profits

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Ch. 8 Menu Analysis - Kasavana Smith

• 1982 Contribution Margin and Popularity
• Matrix analysis - divide items- four categories
• Best menu items (stars) have highest
  contribution margin and largest sales volume.
• Contribution Margin Sales - Direct Costs
• Goal is to maximize contribution margin
• Caution - favors high priced items - Contribution
  Margin is not weighted by sales volume

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Ch. 8 Menu Analysis - Pavesic

• 1983 Food Cost, Contribution Margin, and Sales
  Volume
• Matrix analysis - divide items into four
  categories
• Best menu items (primes) have low food-cost and
  a high contribution margin weighted by sales
  volume
• Caution - Relies on Averages to separate into
  groups

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Ch. 8 Menu Analysis - Hayes Huffman

• 1985 Create a P L for each menu item-
• Algebraic equation that considers contribution
  margin , popularity, selling price, variable
  cost , and food cost
• Goal is to achieve predetermined profit goals -
  Goal Value Analysis
• Creates a goal value for the average menu item.
• Items greater than average will contribute
  greater than average profit percentages

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Ch. 8 Menu Analysis - Hayes Huffman - Goal
Value Analysis

• As goal value for an item increases, so does its
  profitability percentage
• Computed goal value is a numerical target. It is
  not a percent or dollar figure
• It is not dependent on past performance
• All menu items have the potential of reaching
  goal value -Loss leaders used to attract
  customers

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Ch. 8 Menu Analysis - Hayes Huffman - Goal
Value Analysis

• Algebraic equation is A X B X C X D Goal Value
• A 1 - food cost
• B Item popularity
• C Selling price
• D 1.00 - (Variable cost Food cost )
• Shorthand method to predict an items
  profitability

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Ch. 8 Menu Analysis - Hayes Huffman - Goal
Value Analysis

• Argued use of averages means some menu items will
  always fall into the less desirable categories
• Averages are the by -products of what-if
  analysis rather than the independent factors.
• Allows comparison to a specific standard created
  as a result of the what-if analysis
• Allocates costs on the basis of fair share

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Ch. 8 Menu Analysis - Bayou Bennett

• 1992 - Four Levels of profitability
• The operation
• Meal segment ( breakfast, lunch, dinner,
  catering)
• Menu categories (appetizers, entrees, desserts,
  beverages, and beer wine).
• Menu items

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Ch. 8 Menu Analysis - Bayou Bennett

• Argued Menu engineering approach needs to
• Recognize various menu groups ( appetizers,
  entrees, desserts,)
• Differentiate among meal times or food-service
  functions
• Differentiate between profitability over the
  short-run as compared to the long-run analysis

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Ch. 8 Menu Analysis - Bayou Bennett

• Three measures of profitability
• Contribution margin - short-term
• Segment margin -( difference between contribution
  margin and total direct fixed costs for any
  segment - long-term
• Operating income - overall profitability

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Ch. 8 Menu Analysis -Information Sources

• Chapter 8 Analyzing Results Using Basic
  Accounting pages 267-281 from Basic Food and
  Beverage Cost Control by Miller and Hayes, 1994,
  John Wiley Sons, Inc.
• Profitability Analysis for Table-Service
  Restaurants by Bayou and Bennett, pages 49 - 55
  of the April 1992 issue of the Cornell Hotel and
  Restaurant Quarterly

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Ch. 8 Menu Analysis - Information Sources

• Value Pricing How Low Can You Go? by Hayes
  Huffman, pages 51 - 56 of the February 1995 issue
  of the Cornell Hotel and Restaurant Quarterly
• Applies Goal Value Analysis to quick foodservice
  operations value menus

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Ch. 8 Sample Problems

• Pages 361-363 of the text Problems 7, 8 and 9
• These problems are similar to those on your exam

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Chapter 8 Integrated Pricing

• Identify and Explain what is meant by integrated
  pricing.
• Setting prices to maximize profits for the entire
  property.
• Coordinate all departments pricing.

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Chapter 8 Integrated Pricing

• Advantages maximizes profits for entire
  property coordinates pricing in all
  departments.
• Disadvantages generally results in some profit
  centers not maximizing their revenues and their
  departmental income.

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Class Summary

• Discussed Chapter 8 and the homework
• Discussed Goal Value Analysis.