Let's try to answer the original question with an easy example. Assume that prior to increasing your prices, you project annual sales to be $1 million. Further assume that in previous years your average ingredient cost has been 28 percent.

Using the method discussed in Part I, assume you computed the increase in ingredient costs to be 17.4 percent. Multiply $1 million by 28 percent to get $280,000 as your normal budget for ingredients. Now, multiply that by 17.4 percent to get $48,720. This represents the “extra” money needed to pay for the increase in commodity prices.

Assume that your weighted average increase in price was the 12.7 percent from above. The revenue the new prices will bring is one million times 12.7 precent, or $127,000. You should have “extra” revenue of $127,000 minus $48,720, or $78,280 that is available for the increase in future wages or other expenses that might also be on the rise.

In this case, the retail prices have been increased sufficiently to cover the expected increase in food costs, and the additional money will be needed to cover the wage inflation that is sure to come.

After raising your prices, you may have noticed that your labor percentage looks very good. Beware that the drop may mask a work slowdown. Next month's article will be devoted to unmasking this hidden loss of productivity with a new method to track labor.

About the author

Karl Schmitt is C.E.O. and treasurer of Deerfields, a family-run retail bakery in the Chicago area with three locations: Deerfield, Buffalo Grove and Schaumburg, Ill. His training in accounting is from his previous career as a pension consultant and actuary.

Visit www.modern-baking.com for more web-only content