Chapter 1 — Quiz

Twenty-four self-check questions. Answer from memory first; the key is collapsed at the bottom.

Multiple choice

1. Prime cost is: - (a) food cost plus occupancy cost - (b) cost of goods sold plus total labor - (c) all controllable costs - (d) cost of goods sold plus occupancy plus labor

2. The widely repeated claim that 90% of restaurants fail in their first year is: - (a) accurate but only for major metropolitan markets - (b) accurate for independents but not chains - (c) unsupported by any identifiable study - (d) accurate for the first three years, not the first year

3. According to the published research, roughly what share of restaurants close or change ownership within three years? - (a) about 30% - (b) about 45% - (c) about 60% - (d) about 90%

4. A rule-of-thumb prime cost benchmark for a full-service restaurant is: - (a) at or below 40% - (b) at or below 50% - (c) at or below 60% - (d) at or below 70%

5. A party of five is seated and orders three entrées to share. This counts as: - (a) one cover - (b) three covers - (c) five covers - (d) it depends on the POS configuration

6. Which of the following is not one of the four failure mechanisms described in §1.4? - (a) undercapitalization - (b) cost drift - (c) poor critical reception - (d) cash timing

7. Restaurant A runs 26% food cost and 39% labor. Restaurant B runs 32% food cost and 30% labor. On prime cost: - (a) A is better by 3 points - (b) B is better by 3 points - (c) they are identical - (d) cannot be determined without occupancy cost

8. A restaurant that computes food cost by dividing food invoices by food sales is: - (a) using the standard and correct method - (b) ignoring the change in inventory, so the result may be materially wrong - (c) overstating food cost in every case - (d) understating food cost in every case

9. Which cost category typically contains credit-card processing fees? - (a) cost of goods sold - (b) occupancy - (c) other operating - (d) general and administrative

10. Compared with full service, quick service typically runs: - (a) higher labor and higher food cost - (b) lower labor and a lower prime-cost target - (c) higher labor and lower food cost - (d) the same prime cost with a different mix

11. In the failure-survival curve, the largest share of closures occurs: - (a) in the first six months - (b) in months seven through twelve - (c) in years two and three - (d) evenly across the first three years

12. The reason prime cost is computed weekly rather than monthly is primarily: - (a) tax reporting requirements - (b) that lenders require weekly reporting - (c) to shorten the delay between a problem starting and being detected - (d) that inventory cannot be counted monthly

13. A "fixed labor floor" refers to: - (a) the minimum wage in a given jurisdiction - (b) salaried and essential positions that must be paid regardless of volume - (c) the labor budget agreed with a lender - (d) the cost of the opening shift only

14. Sales tax collected from guests is best understood as: - (a) revenue that is taxed later - (b) a liability, not the restaurant's money - (c) part of cost of goods sold - (d) an offset against occupancy cost

15. An independent differs from a chain unit most importantly in that: - (a) it is always smaller - (b) it must build its own operating systems rather than receiving them - (c) it cannot serve alcohol - (d) it is subject to different health regulations

16. In a business keeping roughly four cents on the dollar, a three-point deterioration in prime cost is best described as: - (a) a manageable variance - (b) roughly the entire annual profit - (c) offset automatically by menu price inflation - (d) significant only if sustained beyond two years

Short answer

17. Write the formula for prime cost percentage.

18. A restaurant does $92,000 in weekly sales with $27,500 COGS and $30,400 labor. Compute prime cost percentage and characterize it.

19. Explain in two sentences why an operator who only monitors food cost can be badly misled.

20. Give the formula for average check, and state why covers rather than checks is the correct denominator.

21. Estimate annual dinner revenue for an 80-seat restaurant at 1.25 turns, six nights a week, with a $44 average check.

22. Name the four failure mechanisms and give a one-clause early warning sign for each.

23. Why does the chapter argue that correcting the 90% myth makes the picture more alarming rather than less?

24. A restaurant received two glowing press write-ups and closed eighteen months later with a full dining room most weekends. Explain, in terms of this chapter's framework, how both facts can be true simultaneously.

Answer key — try all twenty-four first **1.** (b) — COGS (food *and* beverage) plus total labor including taxes and benefits. **2.** (c) — It is typically attributed to a study nobody has been able to produce. **3.** (c) — Close to 60%, per the published research, where "failure" includes ownership change. **4.** (c) — At or below 60% for full service; quick service targets lower, around 55%. **5.** (c) — Five covers. A cover is one guest served, regardless of how many entrées are ordered. **6.** (c) — Poor critical reception is a demand-side event; it acts *through* the four mechanisms rather than being one of them. The chapter notes that restaurants with excellent press close all the time. **7.** (b) — A: 26 + 39 = 65%. B: 32 + 30 = 62%. B is better by 3 points. **8.** (b) — Without the change in inventory (beginning + purchases − ending), the figure reflects purchasing timing rather than usage. Buying heavy at period end inflates it; running the walk-in down flatters it. **9.** (c) — Other operating. It is frequently one of the larger lines in that category and one of the least examined. **10.** (b) — Lower labor percentage and a lower prime-cost target, dependent on throughput to spread fixed costs. **11.** (c) — About 26 of 100 are lost in year one, but roughly 34 more are lost across years two and three. **12.** (c) — Monthly reporting with a three-week lag means learning about a problem roughly seven weeks after it began. **13.** (b) — Salaried managers, the chef, opening prep, closing dish: paid whether you do 40 covers or 140, which is why slow dayparts are dangerous. **14.** (b) — It is a liability. It sits in the account making the balance look healthier than it is until it is remitted. **15.** (b) — Where the systems live. A chain unit receives a costed menu, staffing guide, purchasing contract, and oversight; an independent builds all of it. **16.** (b) — Three points on a four-point margin is essentially the whole profit. **17.** $\text{Prime cost \%} = (\text{COGS} + \text{Total labor}) \div \text{Total sales}$ **18.** $(27{,}500 + 30{,}400) \div 92{,}000 = 57{,}900 \div 92{,}000 = \mathbf{62.9\%}$ — above the 60% benchmark; workable but tight, with little cushion. **19.** Food cost and labor trade off against each other, so an excellent food cost may have been purchased with expensive scratch labor. Only the total tells you whether the trade was a good one. **20.** $\text{Average check} = \text{Sales} \div \text{Covers}$. Covers is correct because a check may cover any number of guests; dividing by checks would report table spend, not guest spend, and would move whenever party size changed. **21.** 80 × 1.25 = 100 covers; × $44 = $4,400 per service; × 6 = $26,400 per week; × 52 = **$1,372,800**. **22.** *Undercapitalization* — the reserve is spent before revenue stabilizes. *Cost drift* — prime cost creeps upward while nobody measures it. *Labor* — the floor is not cut on slow shifts and overtime appears unplanned. *Cash timing* — the account is thin in specific weeks despite an apparently profitable year. **23.** A 90% year-one failure rate would describe a random, unmanageable outcome. The real pattern — about a quarter in year one and most of the remaining losses in years two and three — describes businesses that worked and then bled slowly, which means the causes were visible and countable the entire time, and therefore preventable. **24.** Press is a demand-side event: it fills the room but does nothing to the cost structure. A restaurant with a prime cost in the high sixties loses money on every busy night, so a full dining room simply produces losses faster. Volume cannot fix a margin problem.