Management Accounting

Assignment

Wendys Chili :
A Costing Conundrum
Prepared by:
Amit Yadav
Ashish Khola
Khushit Mehta
Rohit Nadgouda
Sameeksha Gupta

5A
12A
21A
37A
42A

Introduction

Wendys Inc. founded in Columbus, Ohio in November 1969

Focus on providing old fashioned, cooked-to-order hamburgers; reasonably

priced and quickly served

Four offerings Hamburger, French fries, Frosty dairy dessert and Chili

Growth by franchising

Drive-through concept very popular in urban and suburban areas

Income from sales and franchise royalties being the major avenues of
revenue

Introduction of more varieties and food items in the menu

By the onset of the third millennium, elimination of one food item was
deemed necessary

Chili was brought under scrutiny and critically examined

Initial success and rapid growth in

an apparently saturated industry

Targeted a different segment young adults and adults

Product differentiation Old fashioned hamburger

Customers could see the preparation process and it was

made to order leading to higher customer satisfaction

Unique shape that appealed to the customers and also

gave the impression of the patty being bigger than the
burger

Customers liked the taste of Wendys a lot more than

those of its competitors products (Mc Donalds, Burger
King)

Limited Menu Pros and Cons and

future menu expansion

Advantages:

Time saving due to preparation of only few specific

items

Cost saving due to smaller range of products

Reduced price due to low cost which would entice

and attract customers

Specialization and development of expertise in

preparation

Value addition 256 varieties of hamburgers with a

core menu of only four items

Limited Menu Pros and Cons and

future menu expansion

Disadvantages:

Threat from competitors they may provide more core

products and varieties

Not suited for vegetarian customers

Customers who wanted variety and option would be

dissatisfied

This could potentially lead to loss of customers to

competitors

Future menu expansion:

To cope with increasing competition, diversified customers

and changing trends, Wendys finally decided to expand its
menu offerings

It thus started offering Salad Bar and Chicken

Success of Wendys drivethrough window concept

First mover advantage

Started in 1970s

Pioneer and originator of the concept

Convenience and ease offered along with the

uniqueness and novelty of the idea

Cost of a bowl of Chili

Bowl of Chili - Full cost
Description
Cost/ unit Qty. Cost per batch Cost per 8oz. serving Cost per 12oz. serving
Tomatoes
2.75
1
2.75
0.048
0.072
Tomato J uice
1.25
5
6.25
0.110
0.164
Seasoning
1
1
1
0.018
0.026
Red Beans
2.25
2
4.5
0.079
0.118
Beef patties
3.5 12
42
0.737
1.105
Total material cost
56.5
0.991
1.487
Asst M ngr's salary
10.5 0.3
2.625
0.046
0.069
Taxes and other costs
0.575 0.3
0.144
0.003
0.004
Serving bowl
0.035 57
1.995
0.035
0.053
Spoons
0.01 57
0.57
0.010
0.015
Total cost for Dine-in
61.834
1.085
1.627
Lid for take-out
0.025
0.025
0.025
Total cost for Take-Out
1.110
1.652

Assumptions:
Time taken for preparation is assumed 15 minutes (as average is 10-15
minutes; but, the different activities add up to more than 15 minutes
so higher range is taken)
Assistant manager is the only staff member to work on chili
preparation hence only his salary is considered

Cost of a bowl of Chili

Full cost
Less: Sunk costs
Assistant manager's salary
Taxes and other costs
Beef patties
Total cost for Dine-in

Bowl of Chili - Out of pocket cost

Total cost per batch Cost per 8oz. serving Cost per 12oz. serving
61.834
1.085
1.627
2.625
0.144
38
21.265

0.046
0.003
0.663
0.373

0.069
0.004
0.995
0.560

All the data for servings is calculated for an 8 oz. intended pot, consisting
of 57 servings

Thus, we have reduced the sunk costs from the full cost to arrive at the
out-of-pocket cost

Chili is the fourth item on the menu and is a separate offering which
requires 12 pounds of beef patties per serving.

However, the beef patties are taken from pre-cooked previous patties for
90% of the time, so 90% of the cost of patties ($42 per batch) is
subtracted as sunk cost, since the patties would have gone waste anyway

Profitability of Chili

For determining profitability, we have considered

only the dine-in cost, as that happens to be the
majority mode of sales

Also, we have considered the out-of-pocket cost as

it considers only relevant costs for determining
profitability

Item sold
Cost
Revenue (Price) Profit
Both the variants are profitable
8 Ounce
0.373
0.99
12 Ounce
0.560
1.59

0.617
1.030

Chili continue or drop?

Very profitable venture. It should be continued

Sales are at around 5% of total store sales,

which shows very little contribution to the
overall revenue

Growth of sales revenue is good and can be

leveraged to earn higher profits

Hence, after critical examination, we feel that

Chili should be continued the menu

Thank You