Establishing Cost And Selling Prices Retail Beef Cuts
( Originally Published Early 1900's )
Midwestern or Chicago Style of Cutting
Test Sheets Nos. 1 to 20
In previous chapters, the author has pointed out some of the disadvantages in the retail meat industry. One of the principal shortcomings discovered was the difficulty of establishing a correct cost and selling price, or rather the absence of any definite method of accomplishing this important task.
Detailed Explanations of Test Sheets
In this chapter, tests and charts are given which show a method of establishing a true cost and then a selling price. These tests and charts are based upon actual facts, and rule-of-thumb methods have been entirely discarded. These charts present facts which, no doubt, will be a revelation to the majority of retailers, for they bring out the one great difference which exists between the figuring of cost and selling prices in most any other line of business as compared to the retail meat business.
A Simple Example
As an example, if a grocer buys 100 pounds of sugar which has cost him 10 cents per pound and he wants to make 33% profit on the selling price, he will sell each pound of the sugar for 15 cents per pound. He accordingly makes 33% profit on the sales price. This example is fundamentally correct as it applies to most any business except the retail meat business unless a carcass is sold as a whole. If the retailer buys a whole carcass for $10.00, he must sell the whole carcass for $15.00 to realize a profit of 33% on the sale. If this were the method of selling meats in every day practice, the problem of cost and selling prices would be a very simple one.
However, when the meat retailer, buys a carcass of beef, veal, lamb or pork, he divides it into many cuts. Some of the waste fats of the meat, he sells at a low price. For the waste bones, he receives practically nothing. There is an additional cutting waste and loss so that the retailer faces a very difficult problem. Since meats are sold on a "per pound" basis, the problem to solve is: "How to establish a correct cost `per pound' of such meats which he can sell to his trade."
A More Difficult Problem
If a 100-lb. hindquarter has been bought at 10 cents per lb., the retailer knows positively that his first cost has been $10.00 for this 100 lbs. of meat. After trimming this hindquarter and getting it ready to be sold over the counter, he finds that he has only 85 lbs. of meat left. Therefore, the $10.00 he has paid for the 100 lbs. of meat really applies to the 85 lbs. he has left ; or, in other words, his cost "per pound" has advanced considerably.
In this particular case, the 85 lbs. of beef have cost the retailer actually 11.76 cents or very close to 12 cents per lb. This very important fact that the original or PRIME cost is not the actual cost to the retailer is clearly brought out. The tests and charts have all been based upon this fundamental fact in business accounting, namely, to discover, first of all, the actual cost after the PRIME cost is known. All charts have been based upon this principle.
Cutting losses, waste, bones and unsalable trimmings have been deducted from the price of the carcass. The revenue from these items has been added on again. The weight which is left has then been divided into the original price paid for the carcass, thereby giving the ACTUAL cost per pound of the meat.
In order to standardize in these tests, all allowances for fats, waste and bones received for these products have been figured on the following price basis:
Bones 25 cents per 100 lbs.
Suet and cod fat 5 cents per lb.
Shop fat 2 1/2 cents per lb.
The problem of making up a standard test to apply to conditions in all retail markets is the most difficult one to solve. This is because there is such a variety in the grades of beef and other meat products handled in the meat markets that it becomes
extremely difficult to establish a positive standard. Furthermore, the great difference in the quality, grade, and amount of waste on different carcasses makes it still more difficult to establish a standard.
Therefore, the author found it advisable to make up tests and charts based upon a cutting method considered the most practical for a retailer to adopt. Furthermore, to base these tests upon the weight of carcass used in the majority of markets and popular with the largest percentage of retailers throughout the west and middle-west. This test of cutting is typical of the middle-west, otherwise called the "Chicago style," and has there-fore been used as a basis for the main set of test sheets Nos. 1 to 20. It has been used to exemplify the style of cutting which may be considered typical of what the largest number of retailers consider the most practical method of cutting up a carcass.
The localities selected for the four principal tests are Chicago, New York, Baltimore and Spokane. The tests, therefore, may be considered typical of the cutting methods used in the middle-west, Greater New York, Baltimore and the southeastern coast, and the northwestern part of the United States.
Tests to Suit Various Conditions
Since many retailers have a slightly different method of cutting up a carcass, the figures in these tests may not apply to every meat market, as the percentages of wholesale cuts may vary. Furthermore, in allowing credits for fats and suet, it must be taken into consideration that there are a great number of market owners who do not give away fat or suet. Again, there are other markets where fats and suet are placed into rolled roasts, rolled plates or into chuck roasts and where the maximum price is secured for these fats. Where they are not used in this manner, these valuable fats may go to waste. In many sections of the country, it is customary to give away fats and suet with meats. Unless the amount of fat which is given away is taken into consideration, it may account for a great loss of revenue to the retailer.
The retailer, in studying and analyzing these various tests and charts will discover in them a correct guide as to how he can arrive at both a PRIME and an ACTUAL cost, and arrange his selling prices accordingly.
Establishing the Selling Price
After the actual cost has once been established, it becomes fixed. This is different, however, with the selling price, which is usually influenced and governed by local demand and trade conditions. Therefore, selling prices vary greatly in different parts of the country. As an illustration, flank steaks are sold at a low price in many localities, while in another section, where there is a great demand for this steak, they bring higher prices than sirloin- steaks. This brings out the fundamental fact that the law of supply and demand also governs retails prices in the meat business.
In studying the analysis of the various selling prices given in the charts it will be found that they may be varied to meet the conditions of various localities. However, this fundamental fact should be borne in mind : the money to be received for the carcass should correspond with the figure on the bottom of the sheet showing the amount of money which has to be received for the meat to make a definite amount of profit and cover a certain percentage of operating expenses.
Tests Show Different Expenses and Profits.
To apply these tests in a practical manner to the market-owner's problems, they have been based upon various operating expenses such as are most commonly found in the retail meat industry. In the average market, the operating expenses vary from 18 to 23%. Therefore, the charts have been based upon operating expenses of 18, 20, 21, and 22%. In addition, these tests have been based upon the making of a net profit of 5% on sales, so that the total amount of profit desired is figured out on a basis of 23, 25, 26 and 27%.
Each set of beef test sheets, excepting the New York style, have been worked out on a basis of beef costing 10, 12, 14, and 16 cents per lb. This gives a wide range for the average grade of beef handled in the majority of markets.
The figures used in the Chicago and Baltimore cutting tests have been furnished through the courtesy of the Bureau of Agricultural Economics of the United States Department of Agriculture, and may therefore be considered absolutely correct. These tests also offer the retailer an opportunity to make his individual wholesale cuts and divide them into retail cuts. The arbitrary selling prices on these charts have been arranged to effect as nearly as possible a minimum price spread.
Percentage Formula Can Be Established
Retailers who buy beef of a uniform weight and quality can establish some very interesting percentages on these tests, provided their method of cutting is similar. Analysis, for instance, will show that the plate, brisket and shank meat has been sold at the PRIME or first cost of the beef. Chuck and shoulder roasts are sold on a basis of 50% added to the PRIME cost. Sirloin steaks show 100% added to the original cost, and porter-house steaks, 150% added to the original cost.
It is very evident that the smaller the variety of meats handled, the simpler it will be for the retailer to establish a formula by which to guide himself correctly. It will be noted that all the fractions used in these tests are shown on the charts and that they have been figured on the same basis an accountant would figure them out. For practical purposes, however, it is advisable to figure all fractions in favor of the retailer.
Results of a Cutting Test
In taking test sheet No. 1 as an example, the following very interesting figures are discovered:
Total profit desired 23%
Therefore, add to ACTUAL cost 30%
Original or PRIME cost of beef 10 cents per lb.
ACTUAL cost of beef 13.10 cents per lb.
ACTUAL average sales price 17.03 cents per lb.
Total PRIME cost of beef $23.55
Total ACTUAL cost of beef $26.37
To realize 23% on sales on this side of beef, the retailer must realize $34.28. In other words, the test brings out some important fundamental facts, namely, that the side of beef which has originally cost the retailer $23.25, must bring a total of $34.28 in order to make a total profit of 23%.
The wholesale cut of this Chicago style of cutting show the following percentages on this particular test:
The retailer who has been using rule-of-thumb methods in trying to arrive at cost figures of beef will discover that by making cutting tests he has more opportunity of using a pencil for figuring than most any other business man. He will find that making up his own tests will be very helpful to him in giving him the true cost of his products. The retailer will also realize that the only way to simplify methods of establishing cost and selling prices will be brought about by adopting standards in the grading of beef so that he will buy products as close as possible to a standard with live stock products.