St.Ivory Hospital has been hit with a number of complaints about its food service from patients, employees as well as cafeteria customers. These complaints, coupled with a very tight local labor market, have prompted the organization to contact FINS about the possibility of an outsourcing arrangement. The hospital's business office has provided the following information for food service for the year just ended: food costs - $890,000; labor - $85,000; variable overhead - $35,000; allocated fixed overhead - $60,000; and cafeteria net income - $80,000. Conversations with FINS personnel revealed the following information: • FINS will charge St. Ivory Hospital $14 per day for each patient served. Note: This figure has been "marked up" by FINS to reflect the firm's cost of operating the hospital cafeteria. • St. Ivory's 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%. • Labour is the primary driver for variable overhead. If an outsourcing agreement is reached, the hospital labour costs will drop by 90%. FINS plans to use St. Ivory facilities for meal preparation. • Cafeteria net income is expected to increase by 15% because FINS will offer an improved menu selection. Required: A. Should St. Ivory outsource its food-service operation to FINS? B. Provide three qualitative factors St. ivory Hospital should consider before making the final outsourcing decision.
St.Ivory Hospital has been hit with a number of complaints about its food service from patients, employees as well as cafeteria customers. These complaints, coupled with a very tight local labor market, have prompted the organization to contact FINS about the possibility of an outsourcing arrangement.
The hospital's business office has provided the following information for food service for the year just ended: food costs - $890,000; labor - $85,000; variable
Conversations with FINS personnel revealed the following information:
• FINS will charge St. Ivory Hospital $14 per day for each patient served. Note: This figure has been "marked up" by FINS to reflect the firm's cost of operating the hospital cafeteria. • St. Ivory's 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%. • Labour is the primary driver for variable overhead. If an outsourcing agreement is reached, the hospital labour costs will drop by 90%. FINS plans to use St. Ivory facilities for meal preparation. • Cafeteria net income is expected to increase by 15% because FINS will offer an improved menu selection.
Required:
A. Should St. Ivory outsource its food-service operation to FINS? B. Provide three qualitative factors St. ivory Hospital should consider before making the final outsourcing decision.
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