Restaurant Operations & Hospitality Finance
Restaurant Prime Cost & Menu Engineering Formula
Audit restaurant Prime Cost % = (CoGS + Total_Labor) / Sales and classify dishes into Stars, Plowhorses, Puzzles, and Dogs via Michael Kasavana and Donald Smith’s (1982) 70% popularity rule.
Stop judging dishes by Food Cost % instead of Dollar Contribution Margin and 70% Menu-Mix Hurdle!
Two operational rules separate profitable restaurants from high-volume money-losers! At the P&L level, Prime Cost % = (Food_Bev_CoGS + Total_Payroll_And_Benefits) / Total_Sales must stay below ~60%–65% in full-service dining to cover occupancy and profit! At the dish level, Michael Kasavana and Donald Smith (1982) proved why Food Cost % misleads chefs: a $42 ribeye at 40% food cost contributes $25.20 of cash gross profit, beating a $14 pasta at 20% food cost ($11.20 margin) by more than 2x! Kasavana-Smith Menu Engineering cross-tabulates each dish’s Unit Contribution Margin CM_i = Price_i - Cost_i against Category Weighted-Average Contribution Margin WACM = SUMPRODUCT(Units, CM) / SUM(Units) AND compares Dish Menu-Mix Share s_i = Units_i / SUM(Units) against the 70% Popularity Benchmark H_pop = 0.70 * (1 / N_items) — classifying items into Star (High Pop, High CM), Plowhorse (High Pop, Low CM), Puzzle (Low Pop, High CM), and Dog (Low Pop, Low CM)!
Verify on a 4-entree category (Rows 2..5, N = 4 -> 70% Popularity Cutoff = 0.70 / 4 = 0.1750 = 17.50%): Ribeye (Units = 250, CM = $24 -> $6,000), Burger (Units = 400, CM = $10 -> $4,000), Halibut (Units = 150, CM = $22 -> $3,300), and Veggie_Tart (Units = 200, CM = $8.50 -> $1,700; Total Units = 1,000, Total CM = $15,000 -> WACM = $15.00/dish!): Ribeye (Share 25% >= 17.5%, CM $24 >= $15) = "Star"; Burger (Share 40% >= 17.5%, CM $10 < $15) = "Plowhorse"; Halibut (Share 15% < 17.5%, CM $22 >= $15) = "Puzzle" (promote/reposition!); and if Veggie_Tart drops to 100 units, Low Share + Low CM = "Dog"!
| Entree Item (Total = 1,000 Sold, WACM = $15.00, Pop Hurdle = 17.5%) | Mix % & Unit CM | Kasavana-Smith Quadrant |
|---|---|---|
| Dry-Aged Ribeye (250 sold) | 25.0% (>=17.5%) & $24.00 (>=$15) | Star (Keep & Anchor) |
| House Smashburger (400 sold) | 40.0% (>=17.5%) & $10.00 (<$15) | Plowhorse (Nudge Price/Cost) |
| Pan-Roasted Halibut (150 sold) | 15.0% (<17.5%) & $22.00 (>=$15) | Puzzle (Highlight on Menu) |
| Prime Cost % Check ($31k CoGS + $29k Labor / $100k) | (31,000 + 29,000) / 100,000 | 0.6000 (60.0% Target Met) |
Category Weighted-Average Contribution Margin (WACM) & 70% Popularity Hurdle Formula
Always weight WACM by actual units sold SUMPRODUCT(B2:B5, C2:C5) / SUM(B2:B5), NOT simple unweighted AVERAGE(C2:C5)!
=IF(OR(MIN(B2:B5) < 0, SUM(B2:B5) <= 0), "Invalid Menu Volume", ROUND(SUMPRODUCT(B2:B5, C2:C5) / SUM(B2:B5), 2))Kasavana-Smith (1982) Four-Quadrant Dish Classifier Formula
Compare item mix share B2 / SUM($B$2:$B$5) against 0.70 / ROWS($B$2:$B$5) and item CM C2 against WACM!
=LET(sh_i, B2 / SUM($B$2:$B$5), pop_h, 0.7 / ROWS($B$2:$B$5), w_cm, SUMPRODUCT($B$2:$B$5, $C$2:$C$5) / SUM($B$2:$B$5), IFS(AND(sh_i >= pop_h, C2 >= w_cm), "Star", AND(sh_i >= pop_h, C2 < w_cm), "Plowhorse", AND(sh_i < pop_h, C2 >= w_cm), "Puzzle", TRUE, "Dog"))Try the example
Use the original values or change them to test your understanding.