22.17    Downsizing. (CMA, adapted) (60 minutes)

Mayfair Limited currently subsidises cafeteria services for its 200 employees. Mayfair is in the process of reviewing the cafeteria services as cost-cutting measures are needed through- out the organisation to keep the prices of its products competitive. Two alternatives are being evaluated: downsize the cafeteria staff and offer a reduced menu or contract with an outside supplier.

The current cafeteria operation has four employees with a combined base annual salary   of

€110 000 plus additional employee benefits at 25% of salary. The cafeteria operates 250 days each year, and the costs for utilities and equipment maintenance average €30 000 annually. The daily sales include 100 starters at €4.00 each, 80 sandwiches or salads at an average price of €3.00 each, plus an additional €200 for beverages and desserts. The cost of all cafeteria supplies is 60% of revenues.

The plan for downsizing the current operation envisions retaining two of the current employees whose combined base annual salaries total €65 000. A starter menu would no longer be offered, and prices of the remaining items would be increased slightly. Under this

 

 

arrangement, Mayfair expects daily sales of 150 sandwiches or salads at a higher average price of €3.60. The additional revenue for beverages and desserts is expected to increase   to

€230 each day. Because of the elimination of the starter, the cost of all cafeteria supplies is expected to decline to 50% of revenues. All other conditions of operation would remain   the same. Mayfair is willing to continue to subsidise this reduced operation but will not spend more than 20% of the current subsidy.

A proposal has been received from Wilco Foods, an outside supplier who is willing to supply cafeteria services. Wilco has proposed to pay Mayfair €1000 per month for use of the cafeteria and utilities. Mayfair would be expected to cover equipment repair costs. In addition, Wilco would pay Mayfair 4% of all revenues received above the breakeven point. This payment would be made at the end of the year. All other costs incurred by Wilco to supply the cafeteria services are variable and equal 75% of revenues. Wilco plans to  charge

€5.00 for a starter course, and the average price for the sandwich or salad would be €4.00. All other daily sales are expected to average €300. Wilco expects daily sales of 66 starters and 94 sandwiches or salads.

 

Required

1    Determine whether the plan for downsizing the current cafeteria operation would be acceptable to Mayfair Limited. Show your calculations.

2    Is the Wilco Foods proposal more advantageous to Mayfair Limited than the downsizing plan? Show your calculations.