Merit Bay Communications operates a customer call center that handles billing inquiries for several large insurance fi rms. Since the center is located on the outskirts of town, where there are no restaurants within a 20-minute drive, the company has always operated an on-site cafeteria for employees. The cafeteria uses $180,000 in food products each year and serves 5,000 meals per month, at a price of $5 each. It employs fi ve full-time workers whose salaries and benefits total $90,000 per year. Depreciation on the cafeteria equipment is $35,000 per year. Other fixed overhead that is directly related to operating the cafeteria totals $12,000 per year.

Best Ever Foods has offered to take over Merit Bay's cafeteria operations. As part of the transition, current cafeteria employees would become Best Ever employees, and Best Ever would assume all out-of-pocket costs to operate the cafeteria. Best Ever would continue to offer meals at $5 each and would pay Merit Bay $0.50 per meal for the use of its cafeteria facilities.

Required

a. Should Merit Bay continue to operate the employee cafeteria, or should the company accept Best Ever’s offer? Why?

b. Assume that Merit Bay accepted Best Ever’s offer two years ago and that all costs have remained constant. Since then, a new shopping mall has opened close to the company’s location, bringing in several fast-food and quick-service restaurants. Employee demand for cafeteria service has dropped to 1,000 meals per month, and Best Ever has laid off two of the five cafeteria workers. Does it make financial sense for Merit Bay to renew Best Ever’s contract for another year, or should it resume operation of the cafeteria operation?