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Mayfair Corporation - Downsizing Decision Making

Mayfair Corporation currently subsidizes cafeteria services for its 200 employees. Mayfair is in the process of reviewing the cafeteria services because 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 four employees with a combined base annual salary of $110,000 plus additional employee benefits at 25% of salary. The cafeteria operates 250 days each year, and the costs for utilities and equipment maintenance average $30,000 annually. The daily sales include 100 entries at $4.00 each, $80 sandwiches or salads at an average price of $3.00 each, plus an additional $200 for beverages and desserts. The cost of all cafeteria supplies is 60% of revenues.

The plan for downsizing the current operation envisions retaining two of the current employees whose combined base annual salaries total $65,000. An entree would be offered, and prices of the remaining items would be increases slightly. Under this arrangement, Mayfair expects daily sales of 150 sandwiches or salads at a higher average price of $3.60. The additional revenue for beverages and desserts is expected to increase to $230 each day. Because of the elimination of the entree, the cost of all cafeteria supplies is expected to decline to 50% of revenues. All other condition 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 would pay Mayfair 4% of all revenues received able the breakeven point. This payment would be make 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 $5.00 for an entree, and the average price for the sandwich or salad would be $4.00. All other daily sales are expected to average $300. Wilco expects daily sales of 66 entrees and 94 sandwiches or salads.

1. Determine whether the plan for downsizing the current cafeteria operation would be acceptable to Mayfair Corporation. Show your calculations.

2. Is the Wilco Foods proposal more advantageous to Mayfair Corporation than the downsizing plane? Show your calculations

Solution Preview

1. Determine whether the plan for downsizing the current cafeteria operation would be acceptable to Mayfair Corporation. Show your calculations.

Current Situation

Sales [(100 x 4) + (80 x 3) + 200] x 250 days] 210,000
Cost of Goods Sold (210,000 x 60%) 126,000
Employees' Salaries Expense 110,000
Employees' Benefit Expense (110,000 x 25%) 27,500
Annual utilities and equipment maintenance 30,000
Net Loss -83,500

Therefore, Mayfair has to subsidize $83,500 ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to determine Mayfair Corporation's two downsizing alternatives.

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