Solution 7.7

a) Set an inclusive price per meal (table d’hote) which will meet the owners target return

This question requires the profit oriented approach to pricing and thus the following calculations are required.

1) Fixed costs

2) Required return on capital

3) The variable costs. Then question tell us that variable costs excluding food cost amounts to 30% of sales. What is required here is to calculate the average food costs as a percentage of sales and thus the total variable costs.

4) Once Variable costs are calculated as a percentage of sales then one can use the CVP required profit formula to get the level of sales required to achieve the required profit.

5) Divide the level of sales by the forecast covers to get an average price per cover.

1) Fixed costs p.a.	Salaries and other overheads					€	468,400
	Annual interest				8%	450,000	36,000
						€	504,400

2) Required profit p.a.			18%		750,000	€	135,000

3. Average Food Cost	Proportion of			x	Food	=	Weight
	total sales				cost		aver cost
					%		%
Appetiser	0.12				30		3.6
Soup	0.10				25		2.5
Main course	0.55				40		22.0
Dessert	0.15				30		4.5
Coffee	0.08				5		0.4
	1.00						33.0

Other Variable as % sales							-30.0%
Total variable costs							63.3%
Average contribution to sales %							37.0%

4) Required total sales revenue is:
Fixed costs + Profits	=		504,400		+	135,000	€		1,728,108
Contrib to sales %					0.370

5. Number of covers:		320	Days x		160	Cover x		75%	38,400

Price per five course meal							€		45.00

b) Set prices for the individual courses (a la carte) assuming that a la carte prices are higher than table d’hote prices by 30 per cent

The average price for a table d’hote meal is calculated at €45. Thus the average a la carte price for a five course meal should equal €58.50 (€45 x 130%). The €58.5 price is then broken into the proportions that each course makes up of the 5 course meal to give the a la carte price per course.

A la carte prices	Total	x	Proportion of	=	Pricer per
	a la carte		Total sales		course
	€				€
Appetiser	58.50		0.12		7.02
Soup	58.50		0.10		5.85
Main course	58.50		0.55		32.18
Dessert	58.50		0.15		8.78
Coffee	58.50		0.08		4.68
					58.50

c) What should be the inclusive price per meal if there was a reduction in occupancy to 70 per cent and if the general fixed over head increased by 15 per cent

The approach here is to calculate the revised fixed costs figure and then using the CVP required profit formula calculate the sales level that will achieve the required profit. This figure divided by the new level of activity (covers) will give a new average price per 5 course meal to achieve the required profit.

Original fixed costs				€	504,400
Add: increase in general fixed overheads			15%	180,000	27,000
Revised fixed costs					531,400

Required total sales revenue is:
Fixed costs + Profits	=	531,400	+	135,000	€	1,801,081
Contrib to sales %			37%

Number of covers:	320	Days x	160	Covers x	70%	35,840

Price per five course meal					€	50.25

d) Briefly explain the limitations of your approach

The approach can apply only to a single product or mix
Separating costs into fixed and variable is difficult in practice
The approach assumes that fixed costs remain the same for different activity levels
Assumes that variable costs per unit remain the same at all levels of sales
Assumes that selling prices will be constant at all levels of activity
Depicts relationships which are essentially short-term