Question

A Hospital currently prepares its own food. Information regarding the food service is as follows:

Meals per week: 5,800

Variable cost per meal: $4.60

Fixed cost: $9,200 per week

An outside kitchen resource proposes the following:

Rent a new oven for $13,000 per week

Savings with new oven: $2.90 per meal

New fixed costs for food preparation: $6,000 per week (previously $9,200 per week)

What is the break even point with the new oven?

Besides costs, what other factors should be considered when purchasing a new oven?

Do you recommend the purchase of the oven? Why or Why not?

Answer 1

Let's calculate the current cost per week being incurred for preparing food.

Meal per week = 5,800

Variable cost per meal = $4.6

Total Variable cost = 5,800*4.6 = $26,680

Fixed Cost = $9,200

Total cost = Variable cost + Fixed cost = $26,680 + $9,200 = $35,880

For Oven, cost per week

Rental cost per week= $13,000

Fixed cost per week = $6,000

Variable cost per meal= $4.6 - $2.9 = $1.7

Total fixed cost = $13,000+ $6,000 = $19,000

Let's number of meals be X.

hence we can say that cost is $1.7 X + $19,000

For break-even point, we may say as : $1.7 X + $19,000 = $35,880

X = 9,930 meals

Hence with in the same cost, Hospital could make 9,930 meals per week if option of Oven chosen.,

Besides cost, few other things should also be considered:-

- Where Hospital has kitchen employees who are having technical knowledge to operate oven.

- Quality of food is a big parameter which needs to be judged by hospital

- Who will bear the maintenance of the oven in case there is a break-down or regular maintenance is required.

Decision: Cost-wise Hospital should take the oven on rent since it could produce more meals in the same existing cost but at the same point of time factors mentioned above needs to be considered.