Section 5: Relevant Costs and Benefits 10 marks

Wall Market is a retailer with a food court in each of its stores. It currently provides its own food services and the food court typically serves 7,500 customers per month. The associated revenue and costs are as follows:

	Per month	Per customer
Revenue	$ 195,000	$ 26
Direct material	$ 75,000	$ 10
Direct labour	$ 52,500	$ 7
Variable overhead	$ 15,000	$ 2
Fixed overhead	$ 30,000	$ 4
Operating profit	$ 22,500	$ 3

Senior management of Wall Market is considering outsourcing its food services. A outside supplier showed interested in taking over and the negotiation process has led to the following terms:

Wall Market will pay the supplier 70% of revenues generated from the food court.

The supplier would cover all variable expenses, while Wall Market continues to cover all fixed expenses.

Required:

Provide a recommendation as to whether Wall Market should provide its own food service or outsource this function from a financial point of view. Support your recommendation with relevant cost and benefit analysis. (10 marks)