How is the contribution margin for a menu item calculated, and how is it used in menu engineering?

• A. Contribution margin equals selling price minus fixed costs, and is used with item popularity to categorize items into stars, puzzles, plowhorses, and dogs for pricing and promotion decisions.
• B. Contribution margin equals selling price minus variable costs, and it is used with item popularity to categorize items into stars, puzzles, plowhorses, and dogs for pricing and promotion decisions.
• C. Contribution margin equals total revenue minus total costs, and is used to evaluate overall profitability of the menu.
• D. Contribution margin equals gross margin after food cost, and is used to determine menu item substitutions.

Answer: (B)

The key idea is that contribution margin shows how much each sale of a menu item contributes to covering fixed costs and profit, after paying for the costs that vary with that item. It is calculated as selling price minus the variable costs per unit (such as ingredients and the direct labor tied to producing that item). This per-item contribution can be expressed as a dollar amount or as a percentage of the selling price. In menu engineering, you combine this contribution with how often the item sells (popularity) to place items into four categories: high popularity with high contribution (stars), high contribution but low popularity (puzzles), high popularity but low contribution (plowhorses), and low popularity with low contribution (dogs). This helps decide where to price, promote, modify recipes, or cut items. Fixed costs aren’t included in the contribution margin because they don’t change with each item sold, so they don’t affect how much a single sale contributes to overall profitability.