Problem

St. Joseph Hospital has been hit with a number of complaints about its food service from patients, employees, and cafeteria customers. 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; and cafeteria net income, $80,000.

Conversations with NIFS personnel revealed the following information:

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

• 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 outsourcing agreement is reached, hospital labor costs will drop by 90%. NIFS plans to use St. Joseph facilities for meal preparation.

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

Day care in the workplace

"It's close to a $40,000 loser and we ought to devote our efforts elsewhere," noted Karenne Whitmore, after reviewing financial reports of her company's attempt to offer a reduced-price daycare service to employees. The daycare's financial figures for the year just ended follow.

Revenues = $ 120,000

Variable Costs = $ 45,000

Traceable Fixed Costs = $ 89,000

Allocated Corporate Overhead = $ 24,000

If the daycare service/center is closed, 70% of the traceable fixed cost will be avoided. In addition, the company will incur one-time closure costs of $6,800.

1)

- What is meant by the term "outsourcing"?

- Should St. Joseph outsource its food-service operation to NIFS? Use financial measures and illustrations (calculations) to demonstrate your point.

- What factors, other than dollars, should St. Joseph consider before making the final decision?

- Give your recommendation.