Question

Can increasing revenue overcome an increase in the percentage of food cost?

Answer 1

Yes, An increase in revenue can overcome an increase in percentage of food cost if volume of goods sold increases correspondingly which can be seen in the example below:

(amount in $)

Revenue (100*10) 1000

Food Cost (100*3) 300

Gross Profit Margin 700

In above example food cost is 30% of Revenue, now suppose in the above example, the food cost is increased to 40% of revenue:

(amount in $)

Revenue (100*10) 1000

Food Cost (100*4) 400

Gross Profit Margin 600

In case, there is no change in volume, the gross profit margin would be reduced from $700 to $600.

Now, to compensate the increase in food cost and get the initial gross profit of $700, there has to be an increase in revenue to the following amount= (Desired margin/ New Gross margin percentage) = 700/40%= $1167

thus, by selling 17 additional units, increase in food cost can be compensated as stated below:

(amount in $)

Revenue (117*10) 1170

Food Cost (117*4) 468

Gross Profit Margin 702