Titanium Supporting Function (Cafeteria)
Titanium currently subsidizes cafeteria services for its 250 employees. Titanium is in the process of reviewing the cafeteria services as cost-cutting measures are needed throughout the organization to keep the prices of its products competitive. Two alternatives are being evaluated: downsize the cafeteria staff and offer a reduced menu or contract with an outside vendor.
The current cafeteria operation has five employees with a combined annual salary of $155,000 plus additional employee benefits at 25% of salary. The cafeteria operates 260 days each year, and the costs for utilities and equipment maintenance average $52,000 annually. The daily sales include 100 entre´es at $7.20 each, 90 sandwiches or salads at an average price of $4.50 each, and an additional $300 for beverages and desserts. The cost of all cafeteria supplies is 62% of revenues.
The plan for downsizing the current operation envisions retaining two of the current employees whose combined base annual salaries total $94,000. An entre´e would no longer be offered, and prices of the remaining items would be increased slightly. Under this arrangement, Titanium expects daily sales of 160 sandwiches or salads at a higher average price of $5.10. The revenue for beverages and desserts is expected to increase to $340 each day. Because of the elimination of the entre´e, the cost of all cafeteria supplies is expected to drop to 52% of revenues. All other conditions of operation would remain the same. Titanium is willing to continue to subsidize this reduced operation but will not spend more than 20% of the current subsidy.
A proposal has been received from Delicious Foods, an outside vendor that is willing to supply cafeteria services. Delicious Foods has proposed to pay Titanium $1,300 per month for use of the cafeteria and utilities. Titanium would be expected to cover equipment repair costs. In addition, Delicious Foods would pay Titanium 8% of all revenues received above the breakeven point; this payment would be made at the end of the year. All other costs incurred by Delicious Foods to supply the cafeteria services are variable and equal 75% of revenues. Delicious Foods plans to charge $7.80 for an entre´e, and the average price for the sandwich or salad would be $5.50. All other daily sales are expected to average $370. Delicious Foods expects daily sales of 70 entre´es and 98 sandwiches or salads.
1. Determine whether the plan for downsizing the current cafeteria operation would be acceptable to Titanium Corporation. Show all calculations.
2. Is the Delicious Foods proposal more advantageous to Titanium Corporation than the downsizing plan? Show all calculations.
3. Provide a recommendation given the case facts and your analysis.