Mini-Case 3.58 (Essay)

The universitys Wildcat Lair caters to students and serves sandwiches and beverages. It has been reporting losses in past months. In July, for example, the loss was $5,000:

The Lair purchases prepared food directly from University Food Services. This charge varies proportionately with the number and kind of meals served. Personnel paid by the Lair serve the food, tend the cash register, bus and clean tables, and wash dishes. The staffing levels rarely change; the existing staff can usually handle daily fluctuations in volume. Administrative costs are primarily the salaries of the manager and her office staff. Because the university provides support services for the Lair, such as payroll, human resources, and other administrative support, the university charges a surcharge of 10% of its revenues. Utility costs are the costs of cooling, heating, and lighting during its normal operating hours. The universitys management is considering closing the Wildcat Lair because it has been operating at a loss.

Questions:

a) From the perspective of university management, is the university surcharge a relevant cost in deciding whether to close the Lair? Why or why not?

b) Identify possible ways that operations could be modified so that some of the fixed costs become variable costs.

c) Given the Lairs cost function and operating leverage, describe possible benefits of modifying operations so that some of the fixed costs become variable costs.

d) From the perspective of university management, describe the pros and cons of closing the Wildcat Lair.

e) Suppose you are the manager of the Wildcat Lair. Write a memo to persuade the university management to keep the club open.

Revenue Expenses $70,000 Purchases of prepared food $21,000 Serving personnel Cashiers Administrative University surcharge Utilities 30,000 5,500 10,000 7,000 1,500 $75,000 $(5,000) Loss