Shaniqua s restaurant utilizes a contribution margin pricing system. She would like the selling price of a new menu item she is introducing to be $10.00. Her required contribution margin is $4.00. Her labor costs are 30%. What is the amount her kitchen staff can spend on product cost when making the item?

Question

Business

Andrea

22 February, 23:30

Shaniqua s restaurant utilizes a contribution margin pricing system. She would like the selling price of a new menu item she is introducing to be $10.00. Her required contribution margin is $4.00. Her labor costs are 30%. What is the amount her kitchen staff can spend on product cost when making the item?

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Jordon Tate · Answer 1

Her kitchen Staff can spend up to $3.00 on product cost.

Explanation:

Selling price = $10.00

Margin = $4.00

Labor costs = $10.00*30% = $3.00

Selling Price = Contribition margin + Labor costs + Product Cost.

Isolating Product cost from the equation:

Product cost = Selling price - (Contribution margin + Labor costs)

Product cost = $ 10.00 - ($4.00 + $3.00)

Product cost = $ 10.00 - $7.00

Product cost = $ 3.00

The max. amount that kitchen staff can spend on product cost is: $ 3.00