Question- When ground beef prices increase, does the cost of making Wendy's' chili increase? If so, should Wendy's increase the selling price of its chili?

Question -Can any method of allocating the cost of the ground beef result in cost data useful for product profitability purposes?

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) 2001 2000 Revenue: Retail operations $1,925,319 $1,807,841 Other, principally interest 465.878 429.105 $2,391,197 $2,236,946 Costs and expenses: Cost of sales 1,229,277 1,140,840 Company restaurant operating costs 406,185 382,963 Operating costs 91,701 86,272 General and administrative expenses 216,124 208,173 Depreciation and amortization of property and equipment 118,280 108,297 International charges 18,370 Other expense 1,722 5,514 Interest, net 20,528 15,080 $2,083,817 $1,965,509 Income before income taxes 307,380 271,437 Income taxes 113.731 101.789 Net income $ 193.649 $ 169.648 Net income per common and common equivalent share $1.65 $1.44 Dividends per common share $0.24 $0.24Chili Sales The selling prices for all 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 $0.99 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% of total Wendy's store sales compared with about 55% for hamburgers. As shown in Exhibit 1, Wendy's consolidated cost of sales, as a percentage of retail revenues, increased to 63.8% in 2001 from 63.1% in 2000. Food costs in 2001 reflected a 13.4% increase in beef costs, which was partially offset by a 1.6% selling price increase. Retail sales increased by 6.5%, and net income increased by about 14% during 2001.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 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 10 and 15 minutes to prepare a pot (referred to at Wendy's as a batch) of chili. First, the 48 quarter-pound cooked ground beef patties needed for a batch were obtained, if available, from the walk-in cooler. This took about one minute. These patties had been "well-done" sometime during the previous three days. Most of the time, it was not necessary to cook 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 60% of total annual chili sales occurred. If, as only happened approximately 10% 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 10 minutes to cook 48 hamburger patties. Before it was placed in the chili pot, the meat 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, $0.035 each; lids for chili served at the carry-out window, $0.025 each; and spoons, $0.01 each. Table 4. Chili ingredients and costs. Quantity Description Cost No. 10 can of crushed tomatoes $2.75/can 5 46-oz. cans of tomato juice $1.25/can Wendy's seasoning packet $1.00/packet 2 No. 10 cans of red beans $2.25/can 48 Cooked quarter-pound ground beef patties (12 lb. of ground beef) $3.50/lb. Note: The batch of chili described above yielded approximately 57 8-ounce servings. Table 5. Restaurant labor costs. Description Cost Store Manager $800.00/week (salary) Co-Manager $12.50/hour Assistant Manager $10.50/hour Management Trainee $7.00/hour Crew $5.75/hour Note: Payroll taxes and other employee-related costs averaged about 10% of the above amounts