Downsizing. (GMA, adapted) Mayfair Corporation currently subsidizes cafeteria services for its 200 employees. Mayfair is in the process ofreviewing the cafeteria services as cost-cutting measures are needed throughout the organization to keep the prices of its products competi¬

tive. 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 annual salary of

$132,000 plus additional employee benefits at 25% ofsalary. The cafeteria operates 250 days each year, and the costs for utilities and equipment maintenance average $36,000 annually.

The daily sales include 100 entrees at $4.80 each, 80 sandwiches or salads at an average price of $3.60 each, plus an additional $240 for beverages and desserts. The cost of all cafeteria supplies is 60% ofrevenues.

The plan for downsizing the current operation envisions retaining two of the current employees whose combined base annual salaries total $78,000. An entree would no longer be offered, and prices of the remaining items would be increased slightly. Under this arrange¬

ment, Mayfair expects daily sales of 150 sandwiches or salads at a higher average price of

$4.32. The additional revenue for beverages and desserts is expected to increase to $276 each day. Because of the elimination of the entree, the cost of all cafeteria supplies is expected to drop to 50% ofrevenues. 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 who is willing to supply cafeteria services. Wilco has proposed to pay Mayfair $1,200 per month for use of the cafeteria and utilities. Mayfair would be expected to cover equipment repair costs. In addition, Wilco would pay Mayfair 4% of all revenues received above the breakeven scorecSaTrdTand STRATEGIC 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% ofrevenues. Wilco plans to charge $6.00 for an entree, and the average price for the sandwich or salad would be $4.80.

All other daily sales are expected to average $360. Wilco expects daily sales of 66 entrees and 94 sandwiches or salads.

Instructions Form groups oftwo students to complete the following requirements.

Required 1. Determine whether the plan for downsizing the current cafeteria operation would be acceptable to Mayfair Corporation. $how all calculations.

2. Is the Wilco Foods proposal more advantageous to Mayfair Corporation than the downsizing plan? $how all calculations.