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Menu engineering pricing methodologies assess menu items based on contribution margin and popularity.
What are contribution margin and popularity?
Menu engineering is a technique for assessing a restaurant's menu pricing that determines which items to include and their menu prices using sales data and food costs. With such information, menu engineering entails classifying menu items according to their profitability and popularity (sales volume).
Selling price per unit less variable cost per unit equals contribution margin (CM), also known as dollar contribution per unit. The amount of sales income referred to as "Contribution" is the fraction that is not used to pay variable expenses and hence helps to cover fixed costs. One of the fundamental principles of break-even analysis is this idea.
Contribution margin, or the marginal profit per unit sold, is a helpful metric in carrying out different computations and may be used as a gauge of operating leverage in cost-volume-profit analysis, a type of management accounting. The labor-intensive service sector typically has low contribution margins, whereas the capital-intensive industrial sector typically has large contribution margins.
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