St. Luke's Hospital has been hit with a number of complaints about its food service from patients, employees, and cafeteria customers. These complaints, coupled with a very tight local labor market, have prompted the organization to contact Nationwide Institutional Food Service (NIFS) 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 NIFS personnel revealed the following information: · NIFS will charge St. Luke's Hospital $14 per day for each patient served. Note: This figure has been "marked up" by NIFS to reflect the
firm's cost of operating the hospital cafeteria.· St. Luke's 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%.· Labor is the primary driver for variable overhead. If an outsourcing agreement is reached, hospital labor costs will drop by 90%. NIFS plans to use St. Luke's facilities for meal preparation.· Cafeteria net income is expected to increase by 15% because NIFS will offer an improved menu selection.Required: A. What is meant by the term "outsourcing"?B. Should St. Luke's outsource its food-service operation to NIFS?C. What factors, other than dollars, should St. Luke's consider before making the final decision?
What will be an ideal response?
A. Outsourcing is essentially a make-or-buy decision that is, producing a product or service in-house or purchasing it from an external supplier.
B. The hospital would be better off to outsource its food-service operation, benefiting by $115,750 ($930,000 - $814,250). Note: The allocated overhead is not a relevant decision factor.
| ? | St. Luke | NIFS |
| Food Cost | $890,000 | $ --- |
| Labor ($85,000; $85,000 × 10%) | 85,000 | 8,500 |
| Variable overhead ($35,000; $35,000 × 10% | 35,000 | 3,500 |
| Cafeteria net income ($80,000; $80,000 × 115%) | (80,000) | (92,000) |
| NIFS charges (250 beds × 70% × 365 days × $14) | --- | 894,250 |
| Net cost | $930,000 | $814,250 |
C. Factors to consider would include improvement in food quality, reliability of NIFS, elimination of labor problems, and data validity in future years.
You might also like to view...
With reference to a value-added chain, the beginning of the chain consists of:
A) intermediaries. B) buyers. C) suppliers. D) customers.
Not being able to follow through beyond interventions to see long-term results is potentially an example of which of the following?
a. advantage of internal consulting b. advantage of external consulting c. disadvantage of internal consulting d. disadvantage of external consulting
Navy and black are the classic colors for business suits. _________________________
Answer the following statement true (T) or false (F)
Under the WARN Act:
a. large employers are prohibited from closing plants or laying employees off for the purpose of defeating unionization b. large employers must give their employees three months (90 days) advance notice of plant closings and mass layoffs c. large employers must provide outplacement services to employees affected by plant closings and mass layoffs d. all of the above e. none of the above