The Empty Monday Lunch
Your 220-seat banquet operation budgets $2.4 million in revenue at an average check of $76, roughly 31,500 covers a year. Food cost runs 28% of revenue; labor 34%, of which 60% is salaried and scheduled regardless of volume; other variable costs (linen, rentals, space utilities) 9%. The hotel allocates $380,000 of undistributed overhead to the department. A local manufacturer offers 180 covers of Monday lunch, twelve months, at $48 per person. Mondays are empty. The controller argues the offer is below the department's $66 fully loaded cost per cover and should be refused; the chef wants $70 or nothing, because the new menu means new prep. Final payment terms are yours to set.
1. Compute the incremental effect of accepting at $48 and evaluate the controller's argument.
Read the worked answer
Variable cost per cover = food 28% + variable labor 13.6% (40% of 34%) + other 9% = 50.6%. At $48 that is $24.29, leaving contribution of $23.71.
Volume: 180 x 12 = 2,160 covers, so incremental contribution = $51,214.
The controller's $66 full cost is arithmetically correct and decision-irrelevant. It is $38.46 of variable cost at a $76 check plus $27.54 of fixed salaried labor and allocated overhead ($869,600 / 31,500 covers). None of that $869,600 changes because an empty room gets used on Monday. Even re-spreading it over the larger base ($869,600 / 33,739 = $25.77) leaves the offer below full cost - and it is still worth taking, because $51,214 of contribution reaches the bottom line and $0 does not.
But test that the business is genuinely incremental:
- Does Monday service require any fixed addition - a porter, a steward, opening the kitchen ventilation for a shift? A single $150/shift porter for 52 Mondays = $7,800, which still leaves $43,414.
- Does Monday prep push Friday production into overtime? That overtime is a real incremental cost.
- Does an existing client quietly move a Thursday dinner to a Monday lunch at $48? That is the killer - see task 3.
2. You decide to proceed. What commercial terms do you insist on, and why those?
Read the worked answer
Twelve months protects you only if it is enforceable. Terms:
- Minimum guarantee of 150 covers with a 72-hour final count, billed at the guarantee and not at actual attendance. Otherwise weather and holidays erode the $51,214 without warning.
- Deposit ladder: 25% at signing, 50% at 30 days out, balance at 14 days. A defaulting client should at least leave you with fixed costs covered.
- Cancellation ladder stepping down from 100% inside 14 days.
- Escalation: 4% at the anniversary plus food-cost pass-through if plate cost moves more than 5%. At a 50.6% variable ratio there is very little margin to absorb a protein spike.
- Rate fence: the $48 is tied to Monday lunch, this menu, this client. No benchmarking rights, no transfer, no most-favoured-customer language.
- Menu locked. Otherwise the chef's 'raise it to $70' instinct re-enters through substitutions and the price is renegotiated one course at a time.
3. What would change your recommendation from accept to decline?
Read the worked answer
It flips if the business stops being incremental.
Quantify the cannibalisation risk: if 200 covers a month migrate from a $76 dinner (contribution $37.54) to the $48 lunch (contribution $23.71), you lose 200 x 12 x $13.83 = $33,192 a year - two-thirds of the $51,214 gain, for the same labor and the same room.
Second trigger: if the booking needs an extra fixed Monday position ($7,800+) and the prep pushes Friday into overtime, the $51,214 shrinks toward the porter alone.
Third trigger - the one that is easiest to miss: precedent. The moment a second client asks for $48, the analysis stops being 'fill an empty room' and becomes 'repricing the banquet menu,' and the whole department's $2.4 million budget is now built on the new rate. The decision is defensible once, with a fence around it, and indefensible twice.