St. Joseph Hospital has been hit with a number of complaints about its food serv

Question

St. Joseph Hospital has been hit with a number of complaints about its food service from patients. 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. Conversations with NFS personnel revealed the following information: • NIFS will charge St. Joseph Hospital $14 per day for each patient served. • St. Joseph’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 out sourcing agreement is reached, food service labor costs will drop 90%. • NFS plans to use St. Joseph facilities for meal preparation. There will, therefore, be no change in total hospital fixed overhead. Should the hospital outsource its food-service operation? a. No; the hospital would be $103,750 worse off to outsource its food-service operation. b. Yes; the hospital would be $175,750 better off to outsource its food-service operation. c. Yes; the hospital would be $84,250 better off to outsource its food-service operation. d. Yes; the hospital would be $103,750 better off to outsource its food-service operation.

Explanation / Answer

Yes; the hospital would be $103,750 better off to outsource its food-service operation. ie (930000-826250)

Food cost 8,90,000 Labor ($85,000; $85,000 x 10%) 85000 8500 Variable overhead ($35,000; $35,000 x 10%) 35000 3500 Cafeteria food sales ($80,000) -80000 -80000 NIFS charges (250 beds x 70% x 365 days x $14) 894250 Net cost 9,30,000 8,26,250

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