St. Augustine Hospital has been hit with a number of complaints about its food service from patients, employees as well as cafeteria customers. These complaints, coupled with a very tight local labor market, have prompted the organization to contact FINS 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 FINS personnel revealed the following information:• FINS will charge St. Augustine Hospital $14 per day for each patient served. Note:This figure has been "marked up" by FINS to reflect the firm's cost of operating thehospital cafeteria.• St. Augustine's 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%.• Labour is the primary driver for variable overhead. If an outsourcing agreement is reached, the hospital labour costs will drop by 90%. FINS plans to use St. Augustine facilities for meal preparation.• Cafeteria net income is expected to increase by 15% because FINS will offer an improved menu selection.Required:A. Should St. Augustine outsource its food-service operation to FINS?B. Provide three qualitative factors St. Augustine Hospital should consider before making the final outsourcing decision.

Question
Asked Nov 10, 2019
1 views

St. Augustine Hospital has been hit with a number of complaints about its food service from patients, employees as well as cafeteria customers. These complaints, coupled with a very tight local labor market, have prompted the organization to contact FINS 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 FINS personnel revealed the following information:


• FINS will charge St. Augustine Hospital $14 per day for each patient served. Note:This figure has been "marked up" by FINS to reflect the firm's cost of operating thehospital cafeteria.


• St. Augustine's 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%.

• Labour is the primary driver for variable overhead. If an outsourcing agreement is reached, the hospital labour costs will drop by 90%. FINS plans to use St. Augustine facilities for meal preparation.

• Cafeteria net income is expected to increase by 15% because FINS will offer an improved menu selection.

Required:

A. Should St. Augustine outsource its food-service operation to FINS?

B. Provide three qualitative factors St. Augustine Hospital should consider before making the final outsourcing decision.

check_circle

Expert Answer

star
star
star
star
star
1 Rating
Step 1

Calculate net cost under St. Augstine...

help_outline

Image Transcriptionclose

St. Augustine Outsourcing Particulars Workings $894,250 (250* 70% *$14*365) $0 FINS charges $0 $890,000 Food cost $8,500 ($85,000* 10%) $3,500 ($35,000 * 10%) $85,000 Labor cost $35,000 $1,010,000 $80,000 Variable overhead cost $906,250 Total $92,000 ($80,000* 115%) Less: Cafeteria net income $930,000 $814,250 Net cost

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Accounting

Related Accounting Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Presented below is information related to equipment owned by Davis Company at December 31, 2020.    ...

A: Impairment of Assets:Impairment of an asset refers to sudden decrease of the present value of econom...

question_answer

Q: Optima Company is a high-technology organization that produces a mass-storage system. The design of ...

A: Prepare sales budget:

question_answer

Q: I need help solving this problem

A: Calculate the actual price of direct material per square feet.

question_answer

Q: Using T accounts for Cash, Accounts Payable, Purchases, Purchases Returns and Allowances, Purchases ...

A: T-account: The condensed form of a ledger is referred to as T-account. The left-hand side of this ac...

question_answer

Q: Bramble Corp. has a weighted-average unit contribution margin of $30 for its two products Standard a...

A: Formula to compute the net income.

question_answer

Q: Perpetual Inventory Using LIFO Beginning inventory, purchases, and sales data for prepaid cell phone...

A: Perpetual inventory system: It refers to the inventory system that maintains the detailed records of...

question_answer

Q: Jan.  1   Retired a piece of machinery that was purchased on January 1, 2010. The machine cost $64,7...

A: Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. Th...

question_answer

Q: (determining merchandise amounts-periodic) Fill the amounts that are missing.                       ...

A: Fill the amounts that are missing:2016:

question_answer

Q: Blue Spruce Corp. purchased a new machine on October 1, 2020, at a cost of $134,000. The company est...

A: 1. Compute the depreciation expense under straight-line method for 2020- Please see attached Answer ...