Case Study
Education Food Services at Central Maine State University
Pam Worth, Manager of Education Food Services at Central Maine State University (CMSU), is
meeting with a researcher to explain some apparent discrepancies in last year’s budgeted figures
and the actuals. The researcher, a faculty member at another university, is doing field studies in
the food service business. Pam is explaining why she always tries to hide some slack in her
numbers when she prepares her budget. She says that it is her understanding that she is just doing
what others in her company and in her industry do. She agreed to speak to the researcher only
with guarantees of strict confidentiality.
I like to have a moderate cushion in my budget. The stakes are high. If I make my budget my
performance review will be good, almost regardless of whatever else I do during the period, and I
will earn my 20% bonus. If I miss my budget without valid reasons I may not be allowed to keep
my job.
More than that, however, the cushion in the budget allows me to do a better job. I don’t have to
worry that my staff is working at peak efficiency all the time, so I don’t have to supervise every
action. That is better for the staff, also; they hate it when I’m looking over their shoulders. The
cushion also allows me to buy things that I can use to provide the university with better service.
For example, this year I was able to buy several portable bars that we have used already for some
parties. Pam, an accounting graduate of Northern University, is an employee of Contract Food
Services Corporation (CFSC), a large corporation that provides food on a contract basis to
universities, hospitals, and businesses. Pam runs a profit center that provides services only to one
university – CMSU. Her operation provides food at two major, on-campus cafeterias serving
12,000 students and nearly 2,000 faculty and staff. Pam also has responsibility for the vending
machine business on campus, and her employees sometimes provide catering services for oncampus business meetings. Pam’s operation employs 59 regular employees and between 150 and
180 students on a part-time basis. Annual revenues are slightly in excess of $3 million.
Relations between CFSC and CMSU are governed by a contract that is renegotiated each
January for the following academic year. The contract defines the responsibilities of each party.
For example, CMSU administrators are given the power to review and approve CFSC’s service
plans and prices. The university provides all equipment costing over $100. CFSC sets the menus
and hires the employees.
The contract also defines limits of the profits CFSC can earn from the CMSU operation.
CFSC earns 100% of the profits from the food operation up to a limit of 10% profit on sales.
Beyond that limit, profits are split equally with CMSU. The contract is set this way as an
incentive to CFSC managers to provide extra quality and services after they have ensured
themselves a reasonable profit.
Budgets are prepared on a bottom-up basis. In July corporate headquarters personnel send
planning guidelines and assumptions (e.g. employee benefits, inflation) to all operating units.
The operating managers forecast their customer counts, which determines their food
requirements, and then estimate their operating costs for the 18-month period starting in January.
Since the university owns the buildings and equipment the bulk of CFSC’s costs are for food and
labor.
1|Page After the units’ budgets are prepared a series of budge challenge rounds are held to review
the numbers at successively higher CFSC consolidation levels – district, region, division, group,
and corporate. If the numbers meet the managers’ profit expectations the budgets are accepted.
Typically, however, each of the managers in the hierarchy is asked to raise his or her profit
targets. These requests lead to a series of meetings designed to explore whether revenue
projections should be raised or cost projections cut. The size of these profit increase requests are
not predictable, but in recent years they have ranged from zero to 15%.
Pam explains that she routinely hides some cushion in both labor and food costs:
I can build the budget cushion in a lot of places. This year for example: I kept the proportion of meals served on board contracts (which are more lucrative for us)
equivalent to last year’s level even though I know that proportion will be growing
because the trend is to have more students living on campus.
I planned for a number of labor hours at $7.15 when I knew that I would hire students for
those hours, and students don’t earn that much.
I planned no efficiency improvements when I know we almost always improve our
efficiency. There is a learning curve in this business. My superiors know about this
learning curve too – they ran operations just like this – but they don’t object to my having
a cushion. It is to their advantage to have me meet my budget too. These types of things add up. I put just enough in so that I am sure I will be able to meet my
budget targets even after corporate management squeezes some of my cushion out in their
reviews.
I know more about what is happening at CMSU than anyone else. My bosses can’t come here
and check every assumption that I have in the plan. They don’t have the time. My immediate
boss, for example, is responsible for nine units spread over a fairly large geographical area.
You can easily identify new managers – they submit budgets that are realistic. Experienced
managers build in pads for themselves. It’s a bit devious, sure, but it’s not theft. It’s just playing
with projections. The money’s there. Besides, if you don’t build a cushion for yourself you’re not
going to survive for long in this business.
This case was prepared by Professor Kenneth A. Merchant
Copyright © by Kenneth A. Merchant Question
Are Pam’s actions ethical or unethical? Explain. In analyzing the case, use the steps
described in chapter 15. 2|Page Answers are to be in six steps of analyzing ethical issues on page 661 of chapter 15 - Management Control-related Ethical Issues can be
summarized into a four-step framework as follows:
(1) Determine the facts
(2) Determine ethical issues (ethical principles are discussed in this step)
(3) Decision alternatives and their probable consequences
(4) Compare the alternatives with the ethical principles and choose the best alternative.
Case-study Component areas-Grading criteria
Determine the facts
Define the ethical
issues
Decision alternatives
and their probable
consequences
Compare the
alternatives with the
ethical principles and
choose the best
alternative All the facts identified are related to the issue of the case; the facts described the “who”,
“what”, “where”, “when” and “how”
Presents accurate and detailed descriptions of the problems and issues central to the case;
provides well-focused diagnosis of strategic issues and key problems that demonstrates an
excellent grasp of the current situation and strategic challenges
Presents all the alternatives that addresses the issue of the case; highlights the short- and
long-term, positive and negative consequences of the alternatives.
All the alternatives are compared in depth; presents a balanced discussion on the
consequences against their primary principles and values and select the alternative that best
fits. Adapted from: International Assembly for Collegiate Business Education, 11374 Strang Line Road, Lenexa, Kansas 66215, USA 3|Page

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