Q1. How much does a bowl of chili cost on a full cost basis and on an out-of-pocket basis?

Q2. For determining profitability, how much does a bowl of chili really cost??

Table 2 Company Restaurants December 31, 1978 Columbus, Ohio Cincinnati, Ohio Dayton, Ohio Toledo, Ohio Atlanta, Georgia Tampa, Sarasota, St. Petersburg and Clearwater, Florida Jacksonville, Florida Detroit, Michigan Indianapolis, Indiana Fort Worth, Texas Houston, Texas Dallas, Texas Oklahoma City, Oklahoma Tulsa, Oklahoma Memphis, Tennessee Louisville, Kentucky Syracuse, New York West Virginia 20 At this time, there were no franchised restaurants located in any of the market areas served by company restaurants. COMPANY REVENUES Wendy's initial revenues came from four principal sources. As shown in Table 3, these were: sales made by company restaurants, royalties paid by franchise owners (franchisees), technical assistance fees paid by franchise owners, and interest earned on investments. The increase in the percentage of total revenues that resulted from royalties during the five year period covered by Table 3 was primarily caused by the substantial increase that occurred in the number of franchised restaurants relative to the number of company restaurants. Table 3 Percentage Revenue Composition 1974-1978 1974 Year Ended December 31 1975 1976 1977 1978 87. 109/ Revenues: Company restaurants Royalties Technical assistance fees Interest, other income 94.21% 333 93.37% 4.26 90.16% 6.40 9.50 1.70 93 100.00% ,67 100.00% 1.28 100.00% 1.36 100.00% 84.13% 12.65 1.87 1.35 100.00% COSTING THE CHILI 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 cach 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 14 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-eight hamburger patties. CASE. WENDY'S CHITTAMATTOMAT DINDINI 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 nt 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, S.025 each; and spoons, S.01 cach. CHILI SALES 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 percent selling price increase. Retail sales increased by 6.5 percent, and net income increased by about 14 percent during 2001. Table 4 Chili Ingredients and Costs Quantity Description Cost No. 10 can of crushed tomatoes $2.75/can 46 oz. cans of tomato juice 1.25/can Wendy's seasoning packet 1.00/packet No. 10 cans of red beans 2.25/can Cooked 1/4 Ib. ground beef patties (12 lbs. of ground beef) 3.50/1b. Note: The batch of chili described above yielded approximately 57 eight-ounce servings. Table 5 Restaurant Labor Costs Description Store Manager Co-Manager Assistant Manager Management Trainee Crew Cost $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. Exhibit 1 WENDY'S CHILI: A COSTING CONUNDRUM Statement of Income for the Years Ended December 31, 2001 and 2000 (In thousands, except per share data) 200L 2000 Revenue: Retail operations Other, principally interest $1,925,319 465.878 2,391,197 $1,807,841 429.105 2,236,946 Costs and expenses: Cost of sales Company restaurant operating costs Operating costs General and administrative expenses Depreciation and amortization of property and equipment International charges Other expense Interest, net 1,229,277 406,185 91,701 216,124 1,140,840 382,963 86,272 208,173 118,280 1,722 20,528 2.083.817 108,297 18,370 5,514 15.080 1.965,509 Income before income taxes Income taxes 307,380 113.731 271,437 101.789 Net income 193.649 $ 169.648 Net income per common and common equivalent share $1.65 $1.44 Weighted average of common and common equivalent shares outstanding 121,144 122,483 $.24 Dividends per common share $.24