THE MARKETING RELATIONSHIP OF

COSTS AND SALES VOLUME AS PROFIT

PRICING
When a business prices a product, it will need to
incorporate how much the product costs to produce, the
anticipated sales of the product, and how much profit that
business would like to make by selling the product.

Additionally, when considering the cost element of the

pricing model, the business should always evaluate
overhead costs.
SALES VOLUME
 The demand for the product will greatly influence the sales volume of
the product.

 This requires the business to find the right price that will allow the
product to sell while allowing the business to adequately profit from the
sale.

PROFITS
 When looking at the pricing element of the marketing strategy, the
business should also carefully consider a realistic profit number that the
business wants to make on the product.

 Generally, a higher profit point will mean a higher selling price for the
product.
CVP MODEL AND COSTS
 The CVP Model is a mathematical model that allows a business to conduct
a thorough cost-volume-profit analysis.

 Regarding costs, the CVP model helps the business to evaluate the effects
of cost on changes in volume. The purpose of this type of analysis is to
evaluate the profits earned and the costs incurred.

HOW IS CVP ANALYSIS USED?

 Cost-volume-profit analysis is used to determine whether there is an
economic justification for a product to be manufactured.
 FOOD COST
 It has a direct effect on profitability of a restaurant.
 It is an “essential tool” in determining whether food costs targets is being met.

By monitoring these costs closely you will know:

 When to adjust prices
 Buy different products or quantities
 Or change distributors

 Typically, the Average Food Costs are around 28-35% to remain profitable.

HOW TO CALCULATE FOOD COSTS

 The Costs of Goods Sold (COGS) for food is the amount spends on ingredients
for each dish and inventory for a given period of time.
FORMULA:

Food Cost Percentage = Beginning Inventory + Purchases - Ending

Inventory / Food Sales

GIVEN:
• Beginning inventory = $8,000
• Purchases = $1,500
• Ending Inventory = $7,500
• Sales = $6,000

SOLUTION:
($8,000 + 1,500) – 7,500 / 6,000 = .33 x 100 = 33%

RESULT:
Food cost of 33%, so for every dollar/peso in sales it costs you 33 cents.
HOW TO CALCULATE IDEAL FOOD COSTS

 It shows any inconsistencies between Food Cost Percentage and Actual Food Cost
 Unlike Actual food costs, Ideal food costs do not consider Beginning & Ending
Inventories, but looks at Total Costs & Sales.

FORMULA:

Ideal Food Cost Percentage = Total Cost Per Dish / Total Sales Per Dish

GIVEN:
• Total Cost Per Dish = $1,500
• Total Sales Per Dish = $6,000

SOLUTION:
($1,500 / 6,000) = .25 or 25%

RESULT:
Ideal Food Cost Percentage would be 25%.
 BEVERAGE COST/LIQUOR COST

 “the lower the liquor costs, the greater the profits”.

 It is based direct costs and gross margin
 Industry Average for Total Beverage programs is between 18-24%

DIFFERENT COST PERCENTAGE FOR EVERY DRINK TYPE:

• LIQUOR 🥃 = 15%
• DRAFT BEER 🍺 = 20%
• BOTTLED BEER 🍻 = 25%
• WINE 🍷 = can be upwards of 30-40%
HOW TO CALCULATE BEVERAGE/LIQUOR COST

FORMULA:

Cost of Goods Sold (COGS) / Total Liquor Sales = Liquor Cost

GIVEN:
• COGS/Liquor Inventory = $15,000
• Sales = $65,000

SOLUTION:
($15,000 / 65,000) =.23 or 23%

RESULT:
Liquor Cost Percentage would be 23%.

 For every dollar in sales means 23 cents is used to pay for the Liquor, and the other 77
cents is your GROSS MARGIN.
 GROSS MARGIN is the amount of sales revenue after taking out the costs to produce
the item.
 LABOR COST

LABOR COST are anything that is related and include:

• Salaried employees
• Hourly employees
• Bonuses
• Overtime
• Payroll taxes
• Health care
• Vacation and sick days

 A good rule of thumb is to aim to keep Labor Costs between 20-30%

of gross revenue.
HOW TO CALCULATE LABOR COSTS AS A PERCENTAGE

• First is by calculating labor costs as a percentage of total sales and the other as a
percentage of operating costs.

FORMULA:

Total Labor Costs / Total Sales

STEP 1: Collect Total Revenue data from Income Statement or POS system report.
STEP 2: Calculate Total Labor Costs by adding up all categories.
STEP 3: Using the formula, divide Total Labor Cost by Revenue.

GIVEN:
• Sales = $900,000
• Total Labor Costs = $237,000

SOLUTION:
$237,000 / 900,000 x 100 = .26 or 26%

RESULT:
Labor Cost Percentage would be 26% of the sales, which is right within the Industry Average.
 OPERATING EXPENSES
OPERATING EXPENSES is a catchall term that can be thought
of as the opposite of COGS. It deals with the cost of running a
business, but not necessarily the costs of producing a product.

An Operating Expense is an expense a business incurs through

its normal business operations. Often abbreviated as OPEX. It
includes rent, equipment, inventory costs, marketing, payroll,
insurance, step costs, and funds allocated for research and
development.
IMPORTANCE OF OPERATING EXPENSES

OPERATING EXPENSES are important because they can help assess a

company’s cost and stock management efficiency.

• It highlights the level of cost that a company needs to make to generate

revenue.

• If a company incurs relatively higher opex as a percentage of sales

compared to its competitors, that may indicate they are less efficient of
generating those sales.

• The disadvantage of looking at a company’s opex is that it is an absolute

number, not a ratio. Therefore it is unreasonable to be used as a metric to
compare between firms even if they are in the same industry.
THANK YOU FOR
LISTENING!

PRESENTORS:
Manna, Mark Ivan L.
Ruiz, Kristia Justin O.
IV-AHRM