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How much does a bowl of chili cost on a full-cost basis (when all costs are included), and on an out-of-pocket basis?

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Wendy's chili was prepared daily by the assistant manager, in accordance with Wendy's secret recipe. It was slow simmered in a double boiler on a separate range top for a period of from four to six hours. While cooking, the chili had to be stirred at least once each hour, and at the end of the day it was refrigerated for sale the following day. Normally, it took between ten and fifteen minutes to prepare a pot (referred to at Wendy's as a batch) of chili. First, the forty-eight 1/4 lb. cooked ground beef patties needed for a batch were obtained, if available, from the walk-in cooler. This took about one minute to do. These patties were ones that had been "well-done" sometime during the previous three days. Most of the time it was not necessary to cook any meat specifically for use in making chili, although the need to do so was more likely to occur during the months of October through March when approximately sixty percent of total annual chili sales occurred. If, as only happened approximately ten percent of the time, it became necessary to cook meat specifically for use in making chili, the number of beef patties needed were taken from the trays of uncooked hamburgers that had been prepared using a special patty machine, at the rate of 120 patties every five minutes, earlier that morning. On average, it took ten minutes to cook forty might hamburger patties. 87 CASE: WENDY'S CHILE: A COSTING CONUNDRUM Before placing the meat in the chili pot, it had to be chopped into small pieces. This generally took about five minutes to do. The remaining ingredients then had to be obtained from the shelves and mixed with the meat. This process also took about five minutes to complete, after which the chili was ready to be cooked. The quantities and costs of the ingredients needed to make a batch of chili, and the labor costs associated with the different classifications of restaurant personnel are shown in Tables 4 and 5. Other direct costs associated with the chili included: serving bowls, $.03s each; lids for chili served at the carry-out window, $.025 each; and spoons, $.01 coch. Before placing the meat in the chili pot, it had to be chopped into small pieces. This generally took about five minutes to do. The remaining ingredients then had to be obtained from the shelves and mixed with the meat. This process also took about five minutes to complete, after which the chili was ready to be cooked. The quantities and costs of the ingredients needed to make a batch of chili, and the labor costs associated with the different classifications of restaurant personnel are shown in Tables 4 and 5. Other direct costs associated with the chili included: serving bowls, $.035 each; lids for chili served at the carry-out window, $.025 each, and spoons, $.01 each. ES The selling prices for all of Wendy's products sold by company restaurants were set at corporate headquarters. Although some price differences existed among restaurants in different locations, representative prices for 2001 were $.99 for an 8 ounce serving of chili, $1.59 for a 12 ounce serving of chili, and $1.89 for a "single hamburger. Chili sales were seasonal, and comprised about 5 percent of total Wendy's store sales compared to about 55 percent for hamburgers. As shown in Exhibit I, Wendy's consolidated cost of sales, as a percent of retail revenues, increased to 63.9 percent in 2001 from 63.1 percent in 2000, Food costs in 2001 reflected a 13.4 percent increase in beef costs, which was partially offset by a 1.6 perceir selling price increase. Retail sales increased by 6.5 percent, and net income increased by Sbout 14 percent during 2001. Table 4 Chili Ingredients and Costs Cost Quantity $2.75/can - 1.25/can 5 Description No. 10 can of crushed tomatoes 46 oz. cans of tomato juice Wendy's seasoning packet No. 10 cans of red beans Cooked 1/4 lb. ground beef patties (12 lbs. of ground beel) 1 1.00/packet 2.25/can 2 48 3.50/lb. Note: The batch of chili described above yielded approximately 57 eight-ounce servings Table 5 Restaurant Labor Costs Cost Description Store Manager Co-Manager Assistant Manager Management Trainee Crew $800.00/week (salary) 12.50/hour 10.50/hour 7.00/hour 5.75/hour Note: Payroll taxes and other employee-related costs averaged about 10 percent of the above amounts. 1. How was Wendy's able to achieve its initial success and to grow so rapidly at a time when the quick-service hamburger business appeared to be saturated? 2. What benefits might have resulted from Wendy's "limited menu" concept? What were the disadvantages of such a concept? Why was the concept eventually discontinued? 3. Why was Wendy's drive-thru window successful when other quick-service restaurant chains had been unsuccessful at implementing the same concept? 4. How much does a bowl of chili cost on a full cost basis? On an out-of-pocket basis? 5. For determining the true profitability of chili, how much does a bowl of chili really cost? 6. Would you recommend dropping chili from the menu? Why or why not? Wendy's chili was prepared daily by the assistant manager, in accordance with Wendy's secret recipe. It was slow simmered in a double boiler on a separate range top for a period of from four to six hours. While cooking, the chili had to be stirred at least once each hour, and at the end of the day it was refrigerated for sale the following day. Normally, it took between ten and fifteen minutes to prepare a pot (referred to at Wendy's as a batch) of chili. First, the forty-eight 1/4 lb. cooked ground beef patties needed for a batch were obtained, if available, from the walk-in cooler. This took about one minute to do. These patties were ones that had been "well-done" sometime during the previous three days. Most of the time it was not necessary to cook any meat specifically for use in making chili, although the need to do so was more likely to occur during the months of October through March when approximately sixty percent of total annual chili sales occurred. If, as only happened approximately ten percent of the time, it became necessary to cook meat specifically for use in making chili, the number of beef patties needed were taken from the trays of uncooked hamburgers that had been prepared using a special patty machine, at the rate of 120 patties every five minutes, earlier that morning. On average, it took ten minutes to cook forty might hamburger patties. 87 CASE: WENDY'S CHILE: A COSTING CONUNDRUM Before placing the meat in the chili pot, it had to be chopped into small pieces. This generally took about five minutes to do. The remaining ingredients then had to be obtained from the shelves and mixed with the meat. This process also took about five minutes to complete, after which the chili was ready to be cooked. The quantities and costs of the ingredients needed to make a batch of chili, and the labor costs associated with the different classifications of restaurant personnel are shown in Tables 4 and 5. Other direct costs associated with the chili included: serving bowls, $.03s each; lids for chili served at the carry-out window, $.025 each; and spoons, $.01 coch. Before placing the meat in the chili pot, it had to be chopped into small pieces. This generally took about five minutes to do. The remaining ingredients then had to be obtained from the shelves and mixed with the meat. This process also took about five minutes to complete, after which the chili was ready to be cooked. The quantities and costs of the ingredients needed to make a batch of chili, and the labor costs associated with the different classifications of restaurant personnel are shown in Tables 4 and 5. Other direct costs associated with the chili included: serving bowls, $.035 each; lids for chili served at the carry-out window, $.025 each, and spoons, $.01 each. ES The selling prices for all of Wendy's products sold by company restaurants were set at corporate headquarters. Although some price differences existed among restaurants in different locations, representative prices for 2001 were $.99 for an 8 ounce serving of chili, $1.59 for a 12 ounce serving of chili, and $1.89 for a "single hamburger. Chili sales were seasonal, and comprised about 5 percent of total Wendy's store sales compared to about 55 percent for hamburgers. As shown in Exhibit I, Wendy's consolidated cost of sales, as a percent of retail revenues, increased to 63.9 percent in 2001 from 63.1 percent in 2000, Food costs in 2001 reflected a 13.4 percent increase in beef costs, which was partially offset by a 1.6 perceir selling price increase. Retail sales increased by 6.5 percent, and net income increased by Sbout 14 percent during 2001. Table 4 Chili Ingredients and Costs Cost Quantity $2.75/can - 1.25/can 5 Description No. 10 can of crushed tomatoes 46 oz. cans of tomato juice Wendy's seasoning packet No. 10 cans of red beans Cooked 1/4 lb. ground beef patties (12 lbs. of ground beel) 1 1.00/packet 2.25/can 2 48 3.50/lb. Note: The batch of chili described above yielded approximately 57 eight-ounce servings Table 5 Restaurant Labor Costs Cost Description Store Manager Co-Manager Assistant Manager Management Trainee Crew $800.00/week (salary) 12.50/hour 10.50/hour 7.00/hour 5.75/hour Note: Payroll taxes and other employee-related costs averaged about 10 percent of the above amounts. 1. How was Wendy's able to achieve its initial success and to grow so rapidly at a time when the quick-service hamburger business appeared to be saturated? 2. What benefits might have resulted from Wendy's "limited menu" concept? What were the disadvantages of such a concept? Why was the concept eventually discontinued? 3. Why was Wendy's drive-thru window successful when other quick-service restaurant chains had been unsuccessful at implementing the same concept? 4. How much does a bowl of chili cost on a full cost basis? On an out-of-pocket basis? 5. For determining the true profitability of chili, how much does a bowl of chili really cost? 6. Would you recommend dropping chili from the menu? Why or why not