Pricing Your Food

Product
Module designed by Tera Sandvik, LRD, Program
Coordinator; Julie Garden-Robinson, PhD, LRD,
Food and Nutrition Specialist;and Kathleen Tweeten,
MBA, Director, Center for Community Vitality,
Community Economic Development Extension
Specialist; Module updated in 2014 by Kimberly
Beauchamp, Food Safety/Food Entrepreneur
Extension Specialist.

2014
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Presurvey
 Before we begin let’s take a presurvey to
see how much you already know.
 Click here to begin the presurvey.
I have my product, but
how much is it worth?
Costs
 When selling a product, make sure you
make enough profit to cover your:

 Fixed costs

 Variable costs
Fixed Costs
 Fixed costs are expenses that must be
paid no matter how many goods or
services are offered for sale.

 Some examples are:

 Rent
 Utilities
 Insurance
 Internet service
Variable Costs
 Variable costs are expenses that
change with the number of
products offered for sale.

 Some examples are:

 Raw materials (jars, sugar, etc.)
 The more products you sell, the more raw materials
you need to produce the extra products.
 Electric power to run machines
 Cost of maintaining inventory
 You have ways to reduce fixed costs per unit sold.

 If you sell more units, the percentage of fixed

costs is reduced.
$1.50 x 100 units = $150
For example:
 Variable cost = $1.50 $150 + $50 = $200 (total cost)
 Fixed cost = $50 $50/$200 = 25%
 Units sold = 100
$1.50 x 200 units = $300
 Price per unit = $4
 %Fixed cost = 25% $300 + $50 = $350
 If units sold increased to 200: $50/$350 = 14%
 %Fixed cost = 14%
Which of the following is a fixed cost?
A. Sugar
B. Rent
C. Jars

Click to see the answer.

Which of the following is a variable
cost?
A. Insurance
B. Rent
C. Sugar

Click to see the answer.

 Now that you know what fixed and variable costs
are, let’s move on to break even analysis.

 The break even point is how many products you

must sell to cover your costs.

 We’ll go through an example on the next slide,

followed by a link that will give you your break
even point.
Example
 Variable cost (VC) = $2.50
 Fixed cost (FC) = $500
 Price per unit (PPU) = $5
 How many units (A) must you sell to break
even?
 (VC x A) + FC = PPU x A
 (2.50 x A) + 500 = 5 x A
 500 = 5A – 2.5A
 500 = 2.5A
 500/2.5 = A
 A = 200 units must be sold to break even
 Go to the following link using the same numbers as
the previous example and you should get the same
answer of 200 units.

 http://www.dinkytown.net/java/BreakEven.ht
ml
 In case you forgot:
 Variable cost = 2.50
 Fixed cost = 500
 Price per unit = $5
 Hint: Expected unit sales is anything greater than 1.
 In the previous examples, the break even point
was 200 units.

 If more than 200 units are sold, you will have a

profit; if less than 200 units are sold you will
have a loss
Go to:
http://www.dinkytown.net/java/BreakEven.html
 Plug the following numbers into the break
even calculator. Is there a profit or a
loss?
 Variable cost = $2
 Fixed cost = $300
 Expected unit sales = $200
 Price per unit = $4

Click to see the answer.

Profit
Go to:
http://www.dinkytown.net/java/BreakEven.html

 Plug the following numbers into the break

even calculator. What is the break even
point?
 Variable cost = $3 133 Units
 Fixed cost = $400
 Expected unit sales = $200
 Price per unit = $6

Click to see the answer.

Marginal cost
 Marginal cost by definition is the change in cost
that results from changing the output by one
unit.
 Basically it’s the difference in variable costs based on
units sold.

 For example:
 Variable cost = $200 for 15 units sold
 Variable cost = $215 for 16 units sold
 Marginal cost difference = $15
 The difference between variable costs
Marginal cost
 Go to: http://hspm.sph.sc.edu/Cost.html
for a more in-depth, interactive
explanation about marginal costs.
 Remember to come back after exploring
the Web site.
What is marginal cost?
A. The change in cost that results from
changing the output by one unit
B. The cost of overhead
C. The charge for permanent part-time
labor
D. None of the above

Click to see the answer.

Pricing your product
 You have a few ways to price your product:
 Cost-plus pricing
 Cost-based pricing
 Percent food cost pricing
 Contribution pricing
 Working-back method (expected return)
Before moving on to pricing methods, let’s
review a couple of terms and go over a couple of
new ones.
 Fixed costs are expenses that must be paid
no matter how many goods or services are
offered for sale.
 Variable cost are expenses that change
with the number of products offered for sale.
 Direct costs are directly related to the
production of a product.
 Cost of sugar to make jelly is a direct cost.
 Indirect costs are not directly related to the
product, but have to do with overall
production.
 Rent would be an indirect cost.
Cost-plus pricing
 This is a simple and popular way to price a
product/service.
 You buy 100 products for $1,000.
 $1,000/100 = $10
 This is the basis for which you sell each product.

 If you want a 20% profit, you should sell the product

for $12 (120% x $10).
 This method allows you to cover all direct costs and
generate a profit.
 The downside is you have not considered the needs
of the market or compensated for any indirect costs.
Use the cost-plus pricing method in
the following example.
 You buy 50 products for $1,000 and want
to make a profit of 30%.
 What’s the selling price?

Click to see the answer.

$1,000/50 = $20
$20 x 130% = $26
The selling price should be $26.
Cost-based pricing

 Cost-based pricing uses unit costs of ingredients,

expenses and labor to determine the price.
 Costs will fall under fixed or variable costs.
 You need to know your total costs before you can
find your break even point.
 Once you know your total costs, figure out how
much you must sell your product for to cover them.
 Then add your profit.
Cost-based pricing example
 Fixed costs = $200
 Variable costs = $5
 Units = 100
 You want a profit of 20%
 $200 + (100 x $5) =$700
 Total costs = $700
 $700/100=$7 (If you sold them for $7 you would break even)
 $7 x 120% = $8.40
 The selling price should be $8.40 to cover costs and make a
20% profit.
Use the cost-based pricing method
in the following example.
 Fixed costs = $100
 Variable costs = $3
 Units = 50
 You want a profit of 20%. What’s the selling price?
Click to see the answer.
 $100 + (50 x $3) = $250
 Total costs = $250
 $250/50 = $5 (If you sold them for $5.00 you
would break even)
 $5 x 120% = $6
 The selling price should be $6 to cover costs and
make a 20% profit.
Percent food cost pricing
 Percent food cost pricing is based on the theory
that food cost makes up about 40 percent of the
price.

 To establish a price, multiply the food cost by 2.5

(40 percent times 2.5 = 100 percent).

 This method commonly is used for catering

businesses, but only if a product does not require
a great deal of labor or if ingredients are not very
expensive.
Use the percent food cost pricing
method in the following example.
 It costs you $2 to make a club
sandwich.
 What should the selling price be?

Click to see the answer.

$2 x 2.5 = $5
You should sell the
sandwich for $5.
figure out percent food cost
pricing?
A. Cost of labor
B. Kitchen remodeling cost
C. Insurance cost
D. Food cost

Click to see the answer.

Contribution pricing
 Contribution pricing allows you to cover all direct
costs (per product), but also allows a contribution
toward indirect costs and profit.

 The next slide will walk you through an example.

Use the contribution pricing method in
the following example.
 Your product has a direct cost of $50 and you
want to make a contribution of $20 to indirect
cost and profit.
 If indirect costs are $1,000 and you want to
make a profit of $300, how many products do
you have to sell?
Click to see the answer.
$1,000 + $300 = $1300 (indirect cost +
profit)
$1,300/$20 = 65

You need to sell 65 products to cover indirect

cost and make a $300 profit.
Working-back method
 This method is most useful for smaller businesses. 

 If a business sells 100 products each month and

the total costs (fixed, direct, indirect, etc.) for the
month are $1,000 and the business owner expects
to cover all his costs and make a profit of 50%, he
must sell $1,500 worth of products.

 Therefore, the business owner sells his products

at:
  $1,500 / 100 units = $15 per product
Working-back method cont.

 If your price is higher than the competitor using

this method, offer something more to
compensate for the higher price.

 For example:
 A competitor charges $100 for a cake. As a result of
using this pricing method you charge $120. To prevent
losing customers to the cheaper business, upgrade your
service to include delivering the cake.
 The extra quality in the service may require slightly
longer hours, but it will compensate for the higher price.
Use the working-back pricing method
in the following example.
 You sell 200 products each month.
 Total cost = $500
 You want a 50% profit
 What should your selling price be?

Click to see the answer.

500 x 150% = 750

750/200 = $3.75

You should sell your product at $3.75 to

make a 50% profit.
We hope this module has helped you
determine what your product is worth. Use
this module, along with the other modules,
to get you on your way.
Post-survey
 Let’s see what you’ve learned.
 Click here to begin the post-survey.

•The last slide shows additional

resources.
•After the slideshow is done go to
“File” and click on “Print.”
•A box will open up.
•Click on “Slides” under “Print
Range.”
•Type in “38” and click on “okay.”
Additional Resources
 University of Omaha
 http://ecedweb.unomaha.edu/lessons/euse2.htm
 Interactive Tutorial
 http://hspm.sph.sc.edu/COURSES/ECON/Cost/Cos
t.html