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Most restaurants use a contribution margin based mark-up approach to set price for their food and...

Most restaurants use a contribution margin based mark-up approach to set price for their food and beverage items. Is this an appropriate method, why and why not?

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Answer: Resturents uses a contribution margin based mark-up approach to set price for their food and breverage items. This is an appropriate approach. Contribution based mark-up is a system wher a certain percentage is added with the cost to get the price. This method is like cost plus murk-up pricing. In case of Food and breverages, Direct materials cost is the main factor for increase and decrease in the total cost of the product that means variable cost is the key factor here. So, if variable cost increases then contribution decreases so to get the profit as it was, they need to increase the price also. so if the percentage is applied on the total cost then while variable cost increases price also increase which makes the contribution marhin to its favourable stat. As the resturent market and the price of those food and brevarages are very volatile in nature this method of pricing the food and breverages is very helpful.

Thank You..!!

ekkarill92 answered 1 year ago
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