Difficulty: Intermediate | Prerequisites: Basic understanding of cost classification (fixed, variable, sunk), contribution margin, and opportunity cost.
This case sits at the intersection of product costing, relevant cost analysis, and menu-mix decisions in a quick-service restaurant setting. It asks you to think carefully about which costs are truly relevant when deciding whether to keep or drop a product, and forces you to confront the difference between sunk costs and opportunity costs. If you are comfortable with the basics of cost behaviour and contribution margin, you have the tools to work through this. The case is a staple in managerial and cost accounting courses because it makes abstract costing concepts concrete: the numbers are small, but the reasoning applies to any keep-or-drop decision in any industry.
Wendy's chili uses leftover well-done hamburger patties as its main protein, which makes its meat cost look close to zero. But 10% of the time, workers must use fresh patties instead, creating a real opportunity cost because those patties could have been sold as hamburgers. The central question is how to cost the chili accurately so management can decide whether to keep it on the menu or drop it.
Product mix
The combination of all products a company offers for sale. In simple terms, it is the full menu or catalogue a business puts in front of its customers.
Sunk cost
A cost that has already been incurred and cannot be recovered, regardless of any future decision. Think of it as money already spent: it should not influence whether you keep or drop a product going forward.
Opportunity cost
The benefit forgone by choosing one alternative over the next best option. In simple terms, if you use a fresh hamburger patty for chili, the opportunity cost is the profit you would have earned selling that patty as a hamburger.
Relevant cost
A future cost that differs between decision alternatives. Only relevant costs matter for a keep-or-drop decision. Costs that stay the same regardless of the choice are irrelevant to that decision.
Joint cost / by-product costing
The cost of a shared input (here, hamburger meat) that produces more than one output. The well-done patties are essentially a by-product of the hamburger-grilling process, and how you allocate their cost changes the apparent profitability of the chili.
Contribution margin
Selling price minus variable costs. It tells you how much each unit sold contributes toward covering fixed costs and generating profit.
Seasonality
Predictable fluctuation in demand tied to the time of year. Wendy's chili sells roughly 60% of its volume between October and March.
Keep-or-drop decision
A managerial analysis of whether a product, segment, or department should be continued or eliminated, based on whether dropping it would improve overall profitability.
Wendy's opened in Columbus, Ohio with four original products: hamburgers, french fries, chili, and ice cream cones
After the founder's death, the company re-evaluated its product mix to secure long-term profitability
Increased competition (larger, differentiated competitor offerings) led to a $5 million loss in one year
The company responded by expanding its menu to include salads and chicken, broadening the customer base
The core question became whether chili should remain on the menu
The well-done patty system: Wendy's chili recipe used hamburger patties that had been on the grill too long to sell as hamburgers. This reduced food waste and appeared to make the chili's meat cost nearly zero
The 10% fresh-patty problem: Roughly 10% of the time, there were not enough well-done patties available, so workers had to use fresh hamburger patties instead
Fresh patties require additional preparation: 5 minutes for the machine to produce 120 raw patties, then 10 minutes to cook 48 patties, then chopping and further cooking
Total cook time rises to approximately 30 minutes in these cases
The assistant manager's labour time increases, adding to the cost
The costing question: if you treat the well-done patties as free (sunk cost, already written off), the chili looks profitable. If you account for the opportunity cost of the fresh patties and the additional labour, the picture changes
When 48 fresh patties go into chili, they cannot go into hamburger buns
A hamburger likely generates a higher contribution margin per patty than a serving of chili
The opportunity cost is the lost profit from not selling those 48 patties as hamburgers
This cost is invisible in the accounting records but real in economic terms
Chili demand is concentrated in the cooler months (October through March), accounting for roughly 60% of annual chili sales
This means the product ties up menu space and operational attention year-round but generates most of its revenue in only half the year
Seasonal demand patterns affect how you allocate fixed costs and how you evaluate the product's annual contribution
One batch of chili produces approximately 57 servings
The case calculates a cost of roughly $0.81 per serving from a batch
Whether that figure reflects true economic cost depends entirely on which costs you include: just the incremental ingredients and labour, or the opportunity cost of fresh patties as well
Per-serving cost (basic)
Total batch cost / Number of servings per batch = Cost per serving
From the case: Total batch cost / 57 servings = approximately $0.81 per serving
Opportunity cost of fresh patties
Contribution margin per hamburger x Number of fresh patties diverted to chili = Opportunity cost per batch
This figure should be added to the batch cost whenever fresh patties are used (roughly 10% of batches).
Weighted average cost per serving
(0.90 x Cost per serving using well-done patties) + (0.10 x Cost per serving using fresh patties, including opportunity cost) = Weighted average cost per serving
Contribution margin per chili serving
Selling price per serving - Variable cost per serving (ingredients + direct labour + opportunity cost where applicable) = Contribution margin
This case mirrors decisions made in any business that repurposes by-products or waste into saleable goods. Breweries selling spent grain to bakeries, sawmills selling sawdust for particle board, and oil refineries allocating costs across petrol, diesel, and jet fuel all face the same question: what is the true cost of the secondary product when the primary process would happen anyway?
The opportunity cost reasoning also applies well beyond food service. Any time a shared resource (a machine, a worker's time, raw material) could serve two purposes, the cost of using it for one purpose includes the profit lost from not using it for the other.
"The well-done patties are free because they would be thrown away." They are not free in every scenario. When demand for chili forces the use of fresh patties, the meat has a clear economic cost. Even the well-done patties have a disposal alternative (they could be discarded, reducing handling labour), so "free" overstates the case.
"Sunk costs and opportunity costs are the same thing." They are opposites in a decision context. Sunk costs are past and irrelevant. Opportunity costs are forward-looking and entirely relevant.
"If a product covers its variable costs, you should always keep it." This is only true if the resources it uses have no better alternative use. When fresh patties go into chili instead of hamburgers, the contribution margin comparison between chili and hamburgers is what matters.
"Seasonal products should be evaluated on peak-season performance." A fair evaluation uses the full-year picture, including the off-season months when the product still occupies menu space, requires ingredient inventory, and demands staff training.
Expect exam questions asking you to identify which costs are relevant and which are sunk in the Wendy's chili scenario
Be prepared to calculate the opportunity cost of diverting fresh patties from hamburgers to chili
A common exam format: "Should Wendy's keep or drop the chili? Support your answer with a quantitative analysis." You will need to show the contribution margin with and without opportunity costs
Seasonality may appear as a twist: "How does seasonal demand affect your recommendation?" The answer involves annualising the contribution and considering whether off-season losses offset peak-season gains
Distinguish clearly between accounting cost (what appears in the records) and economic cost (which includes opportunity cost). Exams often test whether students can see past the accounting numbers
True or false: The well-done patties used in Wendy's chili have zero cost because they would otherwise be discarded.
Fill in the blank: The ________ cost of using fresh patties for chili is the profit that could have been earned by selling those patties as hamburgers.
True or false: Sunk costs should be included in a keep-or-drop decision.
Fill in the blank: Wendy's chili sales are concentrated in the months of ________ through ________, accounting for about 60% of annual volume.
True or false: If chili covers its variable costs, Wendy's should always keep it on the menu.
Answers: 1. False (10% of the time fresh patties are used, and even well-done patties have handling costs). 2. Opportunity. 3. False. 4. October, March. 5. False (only if the resources have no better alternative use).
Q: What is the central costing dilemma in the Wendy's chili case?
A: The dilemma is whether the meat in the chili should be costed at zero (because well-done patties are a by-product that would otherwise be wasted) or at the opportunity cost of the fresh patties that are sometimes used instead. The answer determines whether the chili appears profitable or not.
Q: Why is the opportunity cost of fresh hamburger patties relevant to the chili costing decision?
A: Because 10% of the time, fresh patties are used in the chili. Those patties could have been sold as hamburgers at a higher contribution margin. Ignoring this opportunity cost understates the true economic cost of the chili.
Q: How does seasonality complicate the keep-or-drop analysis for chili?
A: Chili sells roughly 60% of its annual volume between October and March. During the off-season, it generates less revenue but still occupies menu space, requires inventory, and demands operational attention. An analysis based only on peak months would overstate the product's annual contribution.
Q: Explain why the well-done patties are not truly "free" for costing purposes.
A: Even when well-done patties are used, there is handling and preparation labour involved. More importantly, the system that produces well-done patties (grilling more hamburgers than needed) itself has a cost. And 10% of the time, the system fails to produce enough well-done patties, forcing the use of fresh ones at a real opportunity cost.
Q: If the chili covers its variable costs using the $0.81 per-serving figure, does that automatically mean Wendy's should keep it? Why or why not?
A: Covering variable costs is necessary but not sufficient. If the resources used for chili (particularly fresh patties and the assistant manager's time) could generate a higher contribution margin in another use, then keeping the chili is suboptimal even if it appears to cover its own variable costs. The keep-or-drop decision must account for opportunity costs, not just accounting costs.
This case connects directly to joint and by-product costing (how to allocate the cost of a shared input across multiple outputs). If your course covers joint cost allocation methods (sales value at split-off, net realisable value, physical units), apply them here: the hamburger grill is the split-off point, and well-done patties are the by-product.
It also ties into relevant cost analysis for special decisions, the broader framework that covers make-or-buy, accept-or-reject special orders, and sell-or-process-further. The chili decision is a keep-or-drop variant within that framework.
Finally, the seasonality angle connects to cost-volume-profit (CVP) analysis and the concept of operating leverage: a product with high fixed cost allocation and seasonal demand will show wide swings in apparent profitability across periods.
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