St. Augustine Hospital has been hit with a number of complaints about its food servicefrom patients, employees as well as cafeteria customers. These complaints, coupledwith a very tight local labor market, have prompted the organization to contact FINSabout the possibility of an outsourcing arrangement.The hospital's business office has provided the following information for food servicefor 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 anaverage occupancy rate of 70%.• Labour is the primary driver for variable overhead. If an outsourcing agreement isreached, the hospital labour costs will drop by 90%. FINS plans to use St. Augustinefacilities for meal preparation.• Cafeteria net income is expected to increase by 15% because FINS will offer animproved menu selection.Required:A. Should St. Augustine outsource its food-service operation to FINS?B. Provide three qualitative factors St. Augustine Hospital should consider beforemaking the final outsourcing decision.

Question
Asked Nov 6, 2019
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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 the
hospital 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.

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Expert Answer

Step 1

A. Yes, St. Augustine should outsource its food-service operation to FINS because it is benefiting the company and net cost of ou...

A
Outsourcing
St Augustine
1
- 250*70%14*365
FINS charges
3 Food cost
890000
85000
35000
6 Cafeteria net income -80000
|=B4*10%
-B5*10%
|-B6*(1+15%)
|=SUM(B2 :B6)=SUM(C2:C6)
4 Labor
5Variable overhead
Net cost
A
C
St
Outsourcing
Augustine
1
2 FINS charges
3 Food cost
4 Labor
5 Variable overhead
6 Cafeteria net income
7 Net cost
894250
890000
8500
3500
-92000
814250
85000
35000
-80000
930000
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A Outsourcing St Augustine 1 - 250*70%14*365 FINS charges 3 Food cost 890000 85000 35000 6 Cafeteria net income -80000 |=B4*10% -B5*10% |-B6*(1+15%) |=SUM(B2 :B6)=SUM(C2:C6) 4 Labor 5Variable overhead Net cost A C St Outsourcing Augustine 1 2 FINS charges 3 Food cost 4 Labor 5 Variable overhead 6 Cafeteria net income 7 Net cost 894250 890000 8500 3500 -92000 814250 85000 35000 -80000 930000

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