# Restaurant Supplier – Product Cost Analysis

Evaluating a Vendor Discount Offer

• Charlie sells around 12 cases of hamburgers weekly.

Each case contains 80 hamburgers.

Each hamburger patty costs \$.60.

New vendor offer:

Week 1 order: 50 cases at \$.30 per patty

Then 15 cases for the next 12 weeks at \$.45 per patty

What we are looking for:

The price per patty quoted by the new vendor is attractive, but is this a good deal for the restaurant?

Beyond the cost savings, what other factors need to be considered before buying a lot more hamburgers than you have sold in the past?

How can Joe make this deal more attractive to Charlie?

Solution Plan:

1. How many hamburgers does Charlie normally sell during the period of the contract?

2. What is the total cost of the hamburger inventory for the period?

3. How many hamburgers will Charlie need to purchase under the new vendor contract?

4. What is the total cost of this inventory?

5. What is the average cost of a hamburger under this deal? (Round to the nearest cent.)

6. What is the percent savings per hamburger under the new deal?

7. What is the cost savings in total, if Charlie accepts the new vendor deal rather than buying the same amount of hamburgers at his current vendor price?

8. If hamburger sales remain stable at 12 cases per week during this period, how many hamburgers will Charlie have remaining in inventory at the end of 13 weeks?

9. If hamburger sales remain stable at 12 cases per week into the future, how many weeks will it take to sell the remaining hamburgers? (Round to the nearest week.)

10. If Joe can figure out a way to sell 14 cases a week, how many weeks will it take to sell all of the new vendor inventory? (Round to the nearest week.)

11. Beyond the price per patty savings, what factors should Joe consider when advising Charlie whether or not to take the new deal?

### Comments for Restaurant Supplier – Product Cost Analysis

 Dec 19, 2012 Restaurant Vendor Offer by: Staff Answer Part I 1. How many hamburgers does Charlie normally sell during the period of the contract? The 13 week contract period is too short. 13 weeks does not take into account all the time Charlie needs to sell the excess inventory the new vendor wants Charlie to buy. It will take Charlie slightly over 19 weeks (more than 6 weeks after the contract period ends) to sell everything he is being asked to purchase. This can be computed as follows: Weeks of Inventory purchased from new vendor = Total Cases purchased / cases used per week Total Cases purchased = 1st week purchase + (weeks 2 through 13 purchase) Total Cases purchased = 50 cases + (15 cases) * (12 weeks) Total Cases purchased = 50 cases + 180 cases Total Cases purchased = 230 cases At current Sales levels of 12 cases per week, the number of weeks required to sell all the inventory purchased from the new vendor would be: Weeks = Total Cases purchased / cases used per week Weeks = (230 cases) / (12 cases used per week) Weeks = 19.1666666666667 ≈ 19.2 weeks Total number of patties purchased from the new vendor is the relevant number (not the number of weeks of the contract): Patties from new vendor = 230 cases * 80 patties per case = 18,400 patties 2. What is the total cost of the hamburger inventory for the period? The current cost of 18,400 patties at \$.60 per patty would be: Cost_current = 18,400 patties * .60 per patty = \$11,040 New Vendor Cost would be: 1st week Cost_vendor = 50 cases * 80 patties * .30 per patty = \$1,200 Weeks 2 through 13 Cost_vendor = 15 cases * 80 patties * .45 per patty * 12 weeks = \$6,480 Total cost of purchase through new vendor = 1200 + 6480 = \$7,680 Cost Savings of Purchasing through the new vendor: Cost Savings = Current Cost – New Vendor Cost Cost Savings = \$11,040 – \$7,680 = \$3,360 3. How many hamburgers will Charlie need to purchase under the new vendor contract? Patties from new vendor = 230 cases * 80 patties per case = 18,400 patties ----------------------------------------------

 Dec 19, 2012 Restaurant Vendor Offer by: Staff ---------------------------------------------- Part II 4. What is the total cost of this inventory? 1st week Cost_vendor = 50 cases * 80 patties * .30 per patty = \$1,200 Weeks 2 through 13 Cost_vendor = 15 cases * 80 patties * .45 per patty * 12 weeks = \$6,480 Total cost of purchase through new vendor = 1200 + 6480 = \$7,680 5. What is the average cost of a hamburger under this deal? (Round to the nearest cent.) Average Cost = Total cost / number of patties Average Cost = \$7,680 / 18,400 Average Cost = \$7,680 / 18,400 = 0.4173913043478 Average Cost ≈ \$ 0.42 per patty 6. What is the percent savings per hamburger under the new deal? % Savings = [(0.60 - 0.42) / 0.60] * 100 % Savings = [(0.18) / 0.60] * 100 % Savings = 30% 7. What is the cost savings in total, if Charlie accepts the new vendor deal rather than buying the same amount of hamburgers at his current vendor price? Cost Savings = Current Cost - New Vendor Cost Cost Savings = \$11,040 - \$7,680 = \$3,360 The cumulative cost savings are shown on the following graph: ----------------------------------------------

 Dec 19, 2012 Restaurant Vendor Offer by: Staff ---------------------------------------------- Part III 8. If hamburger sales remain stable at 12 cases per week during this period, how many hamburgers will Charlie have remaining in inventory at the end of 13 weeks? remaining inventory = new vendor purchase – patties sold remaining inventory = 18,400 patties - 13 weeks * 12 cases per week * 80 patties remaining inventory = 18400 - 12480 remaining inventory = 5920 patties 9. If hamburger sales remain stable at 12 cases per week into the future, how many weeks will it take to sell the remaining hamburgers? (Round to the nearest week.) See the calculations in question 1 It will take Charlie slightly more than 6 weeks (after the contract period ends) to sell everything he is being asked to purchase. 10. If Joe can figure out a way to sell 14 cases a week, how many weeks will it take to sell all of the new vendor inventory? (Round to the nearest week.) Weeks = 230 cases / 14 cases Weeks = 16.4286 Weeks ≈ 16 weeks to sell all of the new inventory 11. Beyond the price per patty savings, what factors should Joe consider when advising Charlie whether or not to take the new deal? To get the discount, is Charlie required to pay the entire contract cost up front? Can he make weekly payments? To get the discount, is Charlie required to take delivery of all 230 cases at once? If Charlie must take full delivery at once, does Charlie have the freezer space necessary to store an inventory of 18,400 hamburger patties? If Charlie only needs to take delivery of the first 50 cases initially, and then another 15 cases per week for 12 weeks, this reduces the storage requirements considerably. Under these circumstances, the maximum number of patties he must store is only 5,920, which occurs at the end of the 13th week. (keep in mind that Charles sells 960 patties per week) This is shown on the following graph. All figures are shown as of the end of each week (not the beginning), “after” Charlie has sold 960 hamburgers for that week. To find out what the storage requirements would be at the beginning of the week, just add 960 to each of the data points. ----------------------------------------------

 Dec 19, 2012 Restaurant Vendor Offer by: Staff ---------------------------------------------- Part IV Assuming that Charlie has the enough cash on hand to pay the vendor (\$7,680), how much money will Charlie lose by paying the new vendor the entire amount, rather than putting the money in a savings account of some sort? Charlie needs to test the new hamburger patties on his customers before he places a large order. Since the new vendor is offering a greatly reduced price, it is likely that the quality of the hamburger patties is also reduced. Is the new meat a low quality substitute for the \$.60 patties that Charlie is currently using? Is there more fat? Will the new taste drive customers away? If the new meat does not taste good, Charlie must continue to sell it for 19 weeks or throw it away. Safe Storage requirement. What is taste of the meat after it has been kept in the freezer for several weeks? How much will insurance costs increase with more inventory on hand. Borrowing costs. Payment terms. How can Joe make this deal more attractive to Charlie? Offer to store the excess inventory at no charge and deliver only what Charlie needs each week. Allow Charlie to pay for only what he has actually received. Provide a guarantee to Charlie. For example, allow Charlie to cancel the contract anytime within 6 weeks if the new vendor patties do not live up to Charlie’s expectations. (If the new patties are good quality, a guarantee is will not be risky for the vendor to make. All things being equal, the cost of the new patties is low enough that Charlie will continue to use the new vendor.) Thanks for writing. Staff www.solving-math-problems.com