Mayfair Corporation currently subsidizes cafeteria services for its 250 employees. Mayfair 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 entrées at $7.20 each, 90 sandwiches or salads at an average price of $4.50 each, plus 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 entrée would no longer be offered, and prices of the remaining items would be increased slightly. Under this arrangement, Mayfair 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 entrée, the cost of all cafeteria supplies is expected to drop to 52% of revenues. All other conditions of operation would remain the same. Mayfair 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 Wilco Foods, an outside vendor that is willing to supply cafeteria services. Wilco has proposed to pay Mayfair $1,300 per month for use of the cafeteria and utilities. Mayfair would be expected to cover equipment repair costs. In addition, Wilco would pay Mayfair 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 Wilco to supply the cafeteria services are variable and equal 75% of revenues. Wilco plans to charge $7.80 for an entrée, and the average price for the sandwich or salad would be $5.50. All other daily sales are expected to average $370. Wilco expects daily sales of 70 entrées and 98 sandwiches or salads.
REQUIRED
1. Determine whether the plan for downsizing the current cafeteria operation would be accept able to Mayfair Corporation. Show all calculations.
2. Is the Wilco Foods proposal more advantageous to Mayfair Corporation than the downsizing plan? Show all calculations.