Knowitall has enlisted you to conduct a differential analysis for two business opportunities: outsourcingculinary services, and acquiring a shuttle. Relevant information for each decision is provided below.Decision 1Knowitall is considering outsourcing the culinary function to a third party, King Kitchens. Under the proposedagreement, the inn would be responsible for maintaining the facilities. King Kitchens would be responsible forproviding meals to guests, cleaning the facilities, and restaurant staffing. King Kitchens has a monthly fixed feeof $85,000, and a $5.00 fee per each served meal. Regardless of the decision, customers will be charged anaverage of $25 per meal. The Mabry Inn’s current culinary costs are summarized in Table A:Table A: Current Annual Culinary Costs54,880 estimated annual meals servedDescription CostDirect materials $658,560Direct labor $486,018Overhead* $52,000Total costs $1,196,578*Cost to maintain kitchen and restaurant facilitiesIf the proposal is accepted, the inn will have no control or input over staffing decisions, hours of operations, ormeal selections. However, King Kitchens has a reputation of exceptional food and service.Decision 2Recent customer surveys indicate that guests desire easier access to the nearby downtown area. The best way toprovide transportation is through a shuttle. The inn has the option to purchase or lease the shuttle. The costsassociated with each option are summarized in Table B:Table B: Shuttle CostsDescription Leasing PurchasingPrice $45,000 per year $250,000 purchase priceEst. annual maintenance costs $0 $13,000Passenger capacity 30 passengers 15 passengersUseful life 12 years 12 years InstructionsUsing the information provided, complete the following 1. Conduct a differential analysis for acquiring the shuttle.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Knowitall has enlisted you to conduct a differential analysis for two business opportunities: outsourcing
culinary services, and acquiring a shuttle. Relevant information for each decision is provided below.
Decision 1
Knowitall is considering outsourcing the culinary function to a third party, King Kitchens. Under the proposed
agreement, the inn would be responsible for maintaining the facilities. King Kitchens would be responsible for
providing meals to guests, cleaning the facilities, and restaurant staffing. King Kitchens has a monthly fixed fee
of $85,000, and a $5.00 fee per each served meal. Regardless of the decision, customers will be charged an
average of $25 per meal. The Mabry Inn’s current culinary costs are summarized in Table A:
Table A: Current Annual Culinary Costs
54,880 estimated annual meals served
Description Cost
Direct materials $658,560
Direct labor $486,018
Overhead* $52,000
Total costs $1,196,578
*Cost to maintain kitchen and restaurant facilities
If the proposal is accepted, the inn will have no control or input over staffing decisions, hours of operations, or
meal selections. However, King Kitchens has a reputation of exceptional food and service.
Decision 2
Recent customer surveys indicate that guests desire easier access to the nearby downtown area. The best way to
provide transportation is through a shuttle. The inn has the option to purchase or lease the shuttle. The costs
associated with each option are summarized in Table B:
Table B: Shuttle Costs
Description Leasing Purchasing
Price $45,000 per year $250,000 purchase price
Est. annual maintenance costs $0 $13,000
Passenger capacity 30 passengers 15 passengers
Useful life 12 years 12 years

Instructions
Using the information provided, complete the following
1. Conduct a differential analysis for acquiring the shuttle.

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