5.7.3. Understanding Cost Percentages and Profit in the Restaurant Industry
The breakeven point provides a raw dollar figure, but in the restaurant industry, cost percentages, especially food cost percentages, are of greater importance. A well-managed operation will maintain relatively stable cost percentages, even though the actual dollar amounts may fluctuate weekly or monthly. Increased volume often leads to greater efficiency, thereby reducing production costs and boosting profits.
A cost percentage is calculated by dividing a specific cost by total sales and expressing the result as a percentage:
Cost Percentage = Cost / Total Sales × 100
Specifically:
- food cost percentage = cost of food / total sales ×100
- labor cost percentage = cost of labor / total sales ×100
- overhead cost percentage = cost of overhead / total sales ×100
Example 1
A restaurant has total sales of $3,000. The food cost was $1,200, labor cost was $900, and overhead was $600. Determining the cost percentages
- food cost percentage = $1200 / $3000 = 0.4 = 40%
- labor cost percentage = $900 / $3000 = 0.3 = 30%
- overhead cost percentage = $600 / $3000 =0.2 = 20%
In this example, the sales figure used is the breakeven point. In most cases, actual total sales will exceed the breakeven point, with the surplus representing the before-tax profits of the business.
Example 2
A restaurant has sales of $4,000, food costs of $1,500, labor costs of $1,000, and overhead costs of $800. Determine the cost and profit percentages
- food cost percentage = $1500 / $4000 = 0.375 = 37.5%
- labor cost percentage = $1000 / $4000 = 0.25 = 25%
- overhead cost percentage = $800 / $4000 = 0.2 = 20%
Calculate the profit in dollars:
- Profit = total sales − (food cost + labor cost + overhead cost)
- Profit = $4000 − ($1500 + $1000 + $800) = $4000 − $3300 = $700
Calculate the profit percentage based on total sales:
- profit percentage = $4000 / $700 = 0.175 = 17.5%
Another way to determine the profit percentage is to add the cost percentages and subtract from 100%:
- profit percentage = 100% − total cost percentages
- total cost percentages= 37.5% + 25% + 20% = 82.5%
- profit percentage =100% − 82.5% = 17.5%
In this example, the before-tax profit percentage is 17.5%. It’s important to note that this figure is illustrative and actual restaurant profit margins may vary.
Note: All prices and costs used are examples and do not reflect current costs of ingredients, labor, or menu items.
