I HAVE CALCULATED QUESTIONS 1-3 AND ONLY NEED HELP WITH QUESTION 4

Read Case Study Mead Meals on Wheels

Case Study Mead Meals on Wheels

The Mead Meals on Wheels Center (MMWC) provides meals every day to the homebound elderly. The city of Wabash pays MMWC $32 per week for each person it serves. There is no shortage of demand for MMWCs services among the elderly citizens of Wabash, and MMWC can find qualified recipients for as many meals as it can deliver. Each person helped by MMWC receives two hot meals per day, seven days per week, for a total of 14 meals every week.

To service the contract, MMWC has a central kitchen that has the capacity to produce a maximum of 9,600 meals per day. It costs MMWC an average of $36,000 per week to operate the kitchen and other central facilities regardless of the number of meals that MMWC serves. This covers all of MMWCs fixed costs (e.g., rent, equipment costs, and its personnel including administrative staff) as well as its fixed seasonal service contract costs (utilities, snow removal, etc.).

The first problem that MMWC faces is figuring out how much it can afford to spend per person, per week for food to supply the program. Food is MMWCs only variable expense. You are MMWCs only program analyst.

Question 1: The executive director has come to you to calculate how much MMWC can spend per week, per person and still break even. What do you tell the executive director?

Using your work to define MMWCs spending limit, the executive director prepared a request for bids and sent it to all of the food purveyors in and near Wabash. The best bid came in at $.50 (fifty cents) below the number that you have calculated as MMWCs break-even per person-week. Using the lowest bid and the information given earlier, the executive director wants you to prepare a budget for MMWC in a format that will allow her to monitor MMWCs performance on a quarterly basis for the coming year.

For budgeting purposes, the executive director has told you to assume that there are 13 weeks in each quarter. You know from your experience that the fixed expenses for the organization vary by season. Fixed costs average $38,000 per week in the winter (1st quarter), $34,000 per week in the second quarter, $35,000 in the third quarter, and $37,000 in the fourth quarter.

Question 2: Prepare a budget for the next four quarters of operation for the executive director and summarize it for the full year.

The first quarter of operation was in the midst of a very severe winter. As a result, MMWC was only able to get food to 4,600 people per week on average. In addition, the cold weather and snow caused MMWC to exceed the limits of its snowplowing and heating oil contracts. As a result, MMWCs fixed costs were $2,000 per week above what you had forecast. Luckily, a food purveyor from outside the Wabash city limits responded to MMWCs request for bids just before the quarter began and gave MMWC a bid that was $.75 (seventy-five cents) per person-week below the quote that was used in your budget. That is a full $1.25 below the break-even level that you calculated.

The executive director knows that something has happened because the budgeted numbers and the actual results that she sees on her quarterly operating statement dont match. She wants you to tell her why.

Question 3: Prepare an analysis of variances for the first quarter of the year to help her understand what caused the differences between the results. Provide her with as much detail as you can given the available information, that is, volume variance, price variance, and quantity variance. Be sure to indicate whether those variances were favorable or unfavorable. Dont forget to look at the fixed-cost variance as well.

a.Prepare a revenue variance analysis.

b.Prepare a food expense variance analysis.

c.Calculate the net impact of the severe winter weather and lower food prices on MMWCs first quarter result. Was MMWC better off or worse off?

d.Was the overall aggregate variance large enough to have a significant impact on MMWC during the first quarter? Is it significant when compared to projected annual profits or losses?

During the year, you conducted an analysis of MMWCs kitchen operations and determined that you could increase the capacity of the kitchen to 10,400 meals per day. You see a chance to increase the number of meals that MMWC can deliver to the elderly, as well as a way to increase your weekly revenue. However, expanding the kitchens capacity will require you to purchase $700,000 worth of equipment. The equipment has a useful life of five years. The executive director is interested in any idea that will expand service delivery. But, she is concerned about being able to pay for the equipment. She tells you that MMWCs cost of capital is 9 percent and asks if MMWC should purchase the equipment.

Question 4: What do you tell her? Support your recommendation and present your findings in a way that the executive director will understand.

a.Assuming that you pay your suppliers quarterly and that you are paid by Wabash quarterly, what would you recommend doing?

b.Would your answer be different if you were paid by Wabash and pay your suppliers weekly? Annually?

You finish your capital budget analysis just in time to prepare the operating budget for the coming year. The executive director wants you to use last years budget as a starting point but to update it to reflect the higher fixed costs that occurred during this years winter operations (i.e., the first quarter). In addition, she has decided to accept your recommendation about the equipment. If you decide to go ahead with the purchase, a local bank will lend MMWC the full purchase price of the equipment and only charge MMWC for interest during the first year of the loan. Interest on the loan would be set at 8 percent per year. MMWCs normal policy is to assume a 10 percent residual value on all kitchen equipment and to depreciate it over five years on a straight-line basis.

SOLUTIONS FOR Q 1-3

1) Amount that MMUC can spend per person per week on food

unit revenue = $32 per wek

MMUC can feed = 4800 (9600/2) people per day

BEP= Fixed cost/ contribution per unit

contribution = Selling price - varaible cost

where BEP( quantity ) = 4800

fixed cost = $36,000

SP = $32

$4800 (32-X) = 36,000

X = $24.50

hence $24.50 per persom per week is the maximum amount that MMUC can spend for food.

2) Quanterly revenue =4800 *13*32 = $1996,800

Expenses:

Fixed 1st qarter = $38000 *13 = $494,000

2nd quarter= 34000 *13 = $442,000

3rd quarteer = 35000*13 = $455,000

4th quarter = 37000 * 13 = $481,000

Quarterly = $24.50 - .50 = $24 varable cost

$24 *4800 *13 = $1497,6000

Budget

1st quarter	2nd	3rd	4th	total
revenue	$1996,800	$1996,800	$1996,800	$1996,800	$7987,200
Expenses:
Variable cost	$1497,600	$1497,600	1497,600	$1497,600	$1872,000
Fixed cost	494,000	442,000	455,000	481,000	$7862,400
total cost	$1991,600	$1939,600	$1952,600	$1978,600	$7862,400
Surplus	$5,200	$57,200	$44,200	$18,200	$124,800

3)Expected volume = 4800*13 = $62,400 people

Actual volume = 4600 *13 = 59800 people

Budgeted rate and actual rate = $32

Revenue variance

	Actual	Budget
Volume	59,800	62,400
Quantity	1	1
Rate per unit	$32	$32
Total revenue	$1913,600	$1996,800

Variance = $83,200(U)

Expense variance

Budgeted 4800 people variaaable cost = $24

actual 4600 people variable cost = $23.25

	A	B	C	D
	Actutal change in cost	change in qty	change in volume	Budget
Volume	59800	59800	59800	62,400
Cost per unit	$23.25	$24	$24	$24
Total food expnese	$1390,350	$1435,200	$1435,200	$1497,600

Totla variance $107,250(F) (D-A)

volume variance $62,400(F) (D-C)

quantity variance $0 (C-B)

Cost variance $44,850 (B-A)

input of weather & food prices

Change in revenue $83,200(U)

change in fixed cost $26,000(U)

change in food cost $107,250 (F)

Profit decrease $1950(U)

For Question 4 we will use the calculated per person weekly food cost of $23.25