1. Does the cost of chili vary with the seasons? If so, should the price vary accordingly? Explain. The cost of chili does vary by season. Because in some seasons it is more likely that Wendy’s restaurants will have to utilize beef patties that were not “waste” from unused hamburger patties, the cost of chili would be higher during these seasons. Of course, this assumes that the beef patties that are being used for chili that are “waste” from the hamburgers are not being counting in chili cost because they’ve already been counted in hamburger cost. Although the cost of chili varies, it is inadvisable to change the price accordingly. In markets besides fast food, this may be appropriate. However, a staple customer value provider for fast food chains is consistency. Customers always know what they are getting whether they go to a Wendy’s in California or New York. Therefore, it is likely that the cost of disrupting that consistency in order to vary the price of chili with the cost would be too high to justify the increase in profits.
2. When ground beef prices increase, does the cost of making Wendy’s chili increase? If so should Wendy’s increase the selling price of its chili? Explain. The extent to which the cost of making Wendy’s chili increases as the price of beef increases depends on whether you consider the beef “leftovers” as waste for the hamburgers (and therefore as a ‘free’ ingredient) or as a cost for the chili. Regardless, 10% of the time they are forced to use non-leftover beef for the chili. Therefore, the increased price of beef will increase the price of chili for Wendys.
In addition, this 10% the additional steps needing to be undertaken to prepare the non-leftover beef constitute a labor cost. Assuming that only 10% of the time, the ground beef cost is borne by the chili, the cost associated with the additional labor can be allocated into every batch of chili at a rate of 10%. For simplicity sake, I assumed that the assistant manager would also be cooking the ground beef in order to ready it for use in the chili. However, Wendys could possibly assume that this would be done by a lower level employee. As stated previously, because of the nature of the fast food restaurant business, Wendy’s should not vary the sales price of chili based on the varying cost. Rather, they should keep price as consistent as possible and make blanket changes to price as needed but as infrequently as possible. Cost of chili (one batch):
15 minutes of asst. mgr time $2.625
10% of the time having another 15 minutes of time = $.2625
Other costs = $.07
TOTAL = $59.46
3. How should Wendy’s go about deciding on the sales price of chili? Wendy’s needs to consider two things in deciding the sales price of chili: First, they need to consider the cost structure (as outlined above) and their desired profit margins. They should mark the price up by their desired margins Second, they will need to increase their margins beyond their desired profit margins to account for unsold inventory. They could possibly do this using demand forecasting. 4. Do increased chili sales make hamburger sales more profitable? Explain. This again depends on whether you are counting the beef used in chili as ‘waste’ from the hamburgers and allocating the cost to the hamburgers or if you are not even including the cost for the hamburgers if that meat is eventually used in chili production. Personally, I would recommend that they count the beef as hamburger ‘waste’ and, therefore, a “free” ingredient for the chili. In this case, increased chili sales would have no bearing on hamburger profitability.
However, if they were to allocate the cost of the ground beef to the chili if it was eventually sold then increased chili sales would increase the profitability of the hamburgers. This is because by allocating that cost to chili instead of hamburger when it sells, you are decreasing the cost of hamburgers. Whereas previously the unused hamburgers were “wasted” and were eating away at the profit margins of hamburger sales, now the ground beef would only be considered waste if it did not sell both when it was being used as a hamburger and as chili. 5. Can any method of allocating the cost of the ground beef between hamburgers and chili result in cost data useful for product profitability evaluation purposes? Explain. There are several different ways to allocate the labor and ingredients costs between the hamburgers and the chili. Because the profitability of the products is so intertwined, the best approach is to decide on a way of costing each product and then sticking to it so that you can compare the costs over periods.
It is my belief that the most logical way to allocate the costs in order to achieve usable cost data would be to keep the labor costs of cooking the patties associated with the hamburgers regardless of whether they are sold as hamburgers, sold as chili, or never sold. Additionally, I would allocate the cost of the ground beef to the chili if it is ultimately sold as chili and to the hamburger if it is sold as hamburger or never sold. Additionally, I would continue to distribute the cost of the labor to prepare the non-waste burgers 10% of the time to the chili.