Question

1. Determine the following menu items’ selling prices by using factor and prime cost methods.

Wen’s café is selling lasagna and ribeye steaks and she wonder how much she should charge these items.

The food cost for lasagna is $2.50/portion, and ribeye steak is $5.50/portion.

Her café’s food cost percentage is 30%.

The labor cost associated with producing the lasagna and ribeye steak is $3.00 and $2.50 respectively.

Labor cost percentage is 30%.

How much should Wen price these two menu items by using factor and prime cost methods?

Why are the prices different when using different methods? Which one method do you think Wen should price her items on?

Answer 1

Using Factor Method.

Selling Price= Portion Cost / Food Cost Percentage

Menu : lasagna = $2.50/30 X 100 = $ 8.33

ribeye steak = $5.50/30 X 100 = $ 18.33

Using Prime Cost Method.

Prime cost percentage will be food cost + labour cost i.e (30+30) = 60%

Prime Cost for item : Labour Cost + Food Cost

Menu : lasagna = $(3+2.50) = $ 5.5

ribeye steak = $(2.5+5.50) = $ 8

selling price for each item:

Menu : lasagna =  $ 5.5/60 X 100 = $9.16

ribeye steak = $ 8/60 X 100 = $ 13.33

The difference in price arrived in prime cost method due to the labour cost included in it. Since labour cost is low in ribeye steak, the selling price also is low.

Prime Cost method unlike factor method,takes into account the labour cost aswell along with food cost, and can give a proper calculation with all the direct and indirect costs included in determining the selling price, hence Wen should price her items using Prime cost method. She may make a loss in ribeye steak using this method but will make a profit in lasagna as the labour cost in lasagna is high. For her business it will be the right method to follow.