Reference no: EM131726377
Question - A regional hospital is considering an outsourcing arrangement to provide food services. The following data has been summarized for the year just ended: food costs, $950,000; labour $80,000; variable overhead, $40,000; allocated fixed overhead, $50,000; and cafeteria sales revenue, $75,000.
Discussions with the potential supplier revealed the following:
a. The hospital will be charged $15 for each patient served. This figure has been "marked up" by the supplier to reflect the cost of operating the hospital cafeteria.
b. The hospital is a 250-bed facility and typically has an average occupancy rate of 75%.
c. Labour is the primary driver for variable overhead. If outsourcing is negotiated, hospital labour costs will drop by 90%. The outside supplier will use the hospital's facilities for meal preparation.
d. Cafeteria sales revenue is estimated to increase by 10% due to the improved menu selection.
Required: Should the food service operation be outsourced? Support your answer with appropriate calculations.
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