Merit Bay Communications operates a customer call center that handles billing in
ID: 2498893 • Letter: M
Question
Merit Bay Communications operates a customer call center that handles billing inquiries for several large insurance firms. Since the center is located on the outskirts of town, where there are no restaurants within a 20-minute drive, the company has always operated an on-site cafeteria for employees. The cafeteria uses $180,000 in food products each year and serves 5,000 meals per month, at a price of $5 each. It employs five full-time workers whose salaries and benefits total $90,000 per year. Depreciation on the cafeteria equipment is $35,000 per year. Other fixed overhead that is directly related to operating the cafeteria totals $12,000 per year. Best Ever Foods has offered to take over Merit Bays cafeteria operations. As part of the transition, current cafeteria employees would become Best Ever employees, and Best Ever would assume all out-of-pocket costs to operate the cafeteria. Best Ever would continue to offer meals at $5 each and would pay Merit Bay $0.50 per meal for the use of its cafeteria facilities.
Question: Should Merit Bay continue to operate the employee cafeteria, or should the company accept Best Ever's offer? Why? b)
Explanation / Answer
The total benefits received by Merit Bay from Best Ever on accepting the offer i.e. $30,000 is equilant to the Contribution generated by the Cafeteria facilities. Fixed Cost (Depreciation and Fixed overhead) are not relevant for decision.
So, Merit Bay should accept the offer because Merit Bay after then could able to concentrate on his main business of customer call center that handles billing inquiries for several large insurance firms.
Total Meals revenue per year $300,000 Less: Foood products used ($180000) Less: Salaries and benefits to workers ($90000) Total Contribution by Cafeteria facilities $30,000 Fixed Cost (Depreciation and Fixed overhead) $47000 (These expenses not relevant for decision) Best Ever pays to Merit Bay per meal $0.50 on yearly 60000 meals $30,000