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Wednesday, February 29, 2012

Impact of Discounts on Food Cost %

I am curious if you can shed some light on how to calculate how much food cost variance is attributed to Discounts.
Example below:
I know my discounts should be at 5% of Net sales but they are at 10% of Net Sales. My food cost should be running 30% but is running 33% instead.
Discount Variance 5%
Food Cost Variance 3%
Any numbers can be made up for the scenario to better explain how to calculate the effect. My first assumption was that all the 3% is attributed to the 5% increase in Discounts. But how do I know how much is associated with the discounts?

Thanks for the question Jon.

If we had a food cost of $30,000 and sales of $100,000, our food cost percentage of 30% would be on target for your budget.  You have a consistency issue in your question.

In this example, my $100,000 initial net sales figure would include the first 5% discount.  This reflects the expected 5% discount.  Our 30% is the expected % if the discounts were only 5% (as expected).  Let's call this level the "budgeted food cost %" for your operation.

A food cost of $31,350 would produce a 33% food cost percentage using a $95,000 net sales.  Our gross profit would be $63,650.  You need to look for other explanations of the $1,350 rise from $30,000 of food cost to $31,350.  This amount can not be attributed to the increase in discounts.

You are consuming 4.5% more food for the same gross sales. [$1,350 divided by $30,000]

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