QUESTION 3

Case Study: Urban Bistro Chain LMN Urban Bistros is a distinguished franchise with a presence in numerous urban centers nationwide. Offering a diverse menu ranging from gourmet brunch options to sophisticated evening dining, the franchise is synonymous with culinary excellence, impeccable service, and an inviting dining ambiance.

In recent times, the leadership at LMN Urban Bistros has faced a critical decision: whether to produce or procure specific culinary items for their branches. This decision carries significant weight, directly impacting the cost structure and overall profitability of the franchise. The leadership team must carefully consider factors such as product quality, expenses, and financial metrics before reaching a conclusion.

The franchise operates a centralized culinary facility where they create a variety of culinary masterpieces. They have the option to either continue internal production or opt for external sourcing. The determination of whether to make or buy these products will have extensive effects on their financial dynamics and future business strategies.

The leadership acknowledges that the make or buy decision requires an evaluation of the incremental costs and revenues associated with each alternative. They understand that relevant costs are those directly affected by the decision, such as additional expenditures or cost savings. Conversely, immaterial costs will remain unaffected by the decision.

To ensure an informed choice, LMN Urban Bistros' leadership scrutinizes factors like ingredient procurement expenses, labor costs, quality assurance, production capacity, and supplier reliability. They also factor in the impact on their cash position, as well as any potential shifts in revenue resulting from the decision.

After their thorough analysis, they decide to outsource specific culinary items to reliable suppliers. This strategic decision allows them to focus on their core competencies, improve operational efficiency, and reduce costs. Through a thoughtful evaluation of relevant costs and consideration of cash flow and profitability, LMN Urban Bistros reaches a make or buy decision that significantly enhances their business operations.

3.1 What distinguishes relevant costs from irrelevant costs within the framework of decision-making? (10)

3.2 Urban Bistros is deliberating whether to produce or procure a specific gourmet ingredient. The cost to produce the ingredient in-house amounts to R12 per unit, whereas the cost to purchase it from an external supplier is R13 per unit. The bistro chain currently requires 600 units of this ingredient.

Calculate the incremental cost or savings tied to the make or buy decision. Show all calculations. (10)