Another cost-volume-profit example – supersize portions

In June this year, I was watching a programme called “The men who made us eat more” on BBC. It told the story of how super-size portions and combo-meals came about in fast-food chains like McDonalds, Burger King and other similar ones. One of the participants mentioned how the profit margin on the extra portion (or the additional products in a combo-meal) is huge. He explained why, and the explanation is again an application of understanding costs and volumes (or CVP).

Let’s take the example of a portion of  french fries.  If we think about the cost of a regular size portion first. The variable cost would be mainly the ingredients,  i.e. potato, packaging cost and maybe energy costs. There would be quite a few fixed costs – all the costs associated with the running of the restaurant, including staff costs (they need to be paid even if there are no food orders).  Now if we make the portion size larger, the additional cost will be very small – some extra ingredients, a slightly bigger package and that’s about it.  But, the price increase is proportionately much higher than the cost increase usually. Thus, by encouraging a customer to super-size or buy a combo-deal,  profits can rise at a much faster rate than the corresponding increase in costs.