Chapter 1 — Exercises

Thirty-two problems, graduated from recall through applied judgment. Items marked with a dagger (†) have worked solutions in the Answers to Selected Exercises appendix — try them before you look.

Do the arithmetic by hand or in a spreadsheet. Reading a worked calculation and performing one are different activities, and only the second one sticks.

A. Recall and definitions (1–8)

1. Define prime cost in one sentence, and state the rule-of-thumb benchmark for a full-service restaurant.

2. What is a cover? A party of six orders three entrées to share. How many covers?

3. Write the formula for average check (per-person average).

4. † In your own words, explain the difference between undercapitalization and a cash timing problem. Both end with an empty account — what distinguishes them?

5. List the five standard cost categories on a restaurant P&L above the operating-profit line.

6. What does the published research actually report for first-year restaurant failure, and for three-year failure? What definition of "failure" do those figures use?

7. Name the two components of prime cost, and state which of the two a manager can move fastest.

8. † Distinguish full service, fast casual, and quick service on three dimensions: where the order is taken, the typical labor percentage, and the volume model.

B. Computation: prime cost and the P&L (9–16)

9. † A restaurant reports weekly sales of $84,000, COGS of $25,200, and total labor of $28,600. Compute prime cost in dollars and as a percentage. Characterize it against the benchmark.

10. A restaurant does $1,450,000 in annual sales, split 74% food and 26% beverage. Food cost runs 31%; beverage cost runs 21%. Compute total COGS in dollars and as a percentage of total sales.

11. Using your answer to problem 10, if labor runs 33% of sales, what is prime cost in dollars and as a percentage?

12. † Complete this annual P&L. Sales are $960,000.

13. Take the restaurant in problem 12. Its debt service is $31,000 a year. What is its net, in dollars and as a percentage of sales?

14. † The restaurant in problem 12 improves food cost by 3 points. Food sales are 76% of total. How many dollars does that add to operating profit, and what is the new operating profit percentage?

15. A restaurant's owner wants to know what a one-point improvement in prime cost is worth. Sales are $1,850,000. Compute it. Then express it as a multiple of what a one-point improvement in occupancy cost would be worth.

16. † Two restaurants, both at $1,000,000 in sales:

Compute each one's prime cost. Which has the better position? Then write two sentences describing the operating choices each business has probably made, and one circumstance under which A's approach would nonetheless be the correct one.

C. Computation: covers, check, and revenue (17–22)

17. A 74-seat restaurant serves dinner six nights a week at 1.35 turns with a $41 average check. Estimate annual dinner revenue.

18. † A restaurant did $18,400 in sales last week across 392 covers. What was the average check? If the operator wants to raise the average check to $50 without changing covers, how much additional weekly revenue does that produce, and how much annually?

19. A 68-seat restaurant currently runs 1.4 turns on five dinner services. Management believes a change to the reservation policy could produce 1.55 turns. At a $46 average check, what is that worth annually?

20. † A 55-seat restaurant is considering adding a Sunday brunch service. It expects 95 covers at a $22 average check. Annual revenue added? Now: the service requires a fixed labor floor of $780 per service (a cook, a dishwasher, two servers, and a manager). At a 30% food cost, does the service contribute positively? Show your reasoning.

21. A restaurant's Monday lunch service averages $640 in sales with $310 of labor on the floor. Compute the labor percentage for that service. Write two sentences on what you would want to know before recommending it be closed.

22. † Using the four-variable estimate, build annual revenue for the running project restaurant: 68 seats, 1.4 turns, $46 average check, five dinner services a week; plus two brunch services at 110 covers and a $24 average check. Then compute what the business would need in additional weekly revenue to reach $1,550,000 annually, and suggest two places it could plausibly come from.

D. Diagnosis and judgment (23–28)

23. † An operator tells you: "Food cost is running about 29%, which I'm happy with. We're doing $26,000 a week. But there's never any money in the account." State the three most likely explanations and the single question you would ask first.

24. A restaurant has been open fourteen months. Revenue is flat at $21,000 a week, down from $27,000 in the first two months. The owner is worried. Is this a problem? What would you need to know to answer?

25. A chef-owner proposes bringing bread production in house, arguing it will "cut our food cost." Bread currently costs $340 a week delivered. In-house production would cost an estimated $95 a week in ingredients plus twelve hours of prep labor at $19/hour fully loaded. Evaluate the proposal quantitatively, then name two non-financial factors that could change the answer.

26. † Look again at Figure 1.3 in the chapter. Write the list of seven possible causes of a 34.5% food cost, then rank them by how quickly each could be investigated with information the restaurant already has.

27. An operator computes food cost by dividing food invoices by food sales each month. Explain precisely what is wrong with this, construct a two-month example in which this method reports a falling food cost while the true food cost rises, and state what the operator must do instead.

28. † A restaurant is at 67% prime cost, 6% occupancy, and 14% other operating. A consultant recommends a menu price increase of 4% across the board. Evaluate this recommendation: what would it do to prime cost if covers held, what is the risk, and what would you want to do first instead?

E. Writing and the Business Plan (29–32)

29. Write a one-paragraph explanation of prime cost suitable for a new assistant manager who has never seen a P&L. No jargon, one worked number.

30. † The myth of the 90% failure rate persists partly because it is repeated by people who ought to check. Write a 200-word note you could hand to a prospective investor who has just cited it, correcting the figure and explaining why the correction makes the investment case more demanding rather than less.

31. Business Plan extension. For the running project — or for your own concept, if you are working Appendix C — write the "target the plan must beat" table from the chapter's checkpoint, with your own numbers: required annual revenue, prime-cost ceiling, occupancy ceiling, and a working-capital reserve figure. Justify each number in one sentence.

32. † Business Plan extension. List the five open questions the Chapter 1 checkpoint carries forward. For each, write the single piece of evidence that would settle it, and name the chapter you expect to find that evidence in. Then add a sixth question of your own that the checkpoint does not raise but should.