Short term decision-making

(Part 1)

Sedili Hospital was considering to outsource its food service so that it could focus on its core activities. An experienced supplier,Rely Food Service (RFS) has been contacted forthe possibility of an outsourcing arrangement.

The hospital's business office has provided the following information for food service for the year just ended: food costs, RM445,000; labor, RM42,500; variable overhead, RM17,500; allocated fixed overhead, RM30,000; and cafeteria sales revenue, RM40,000. The following information was provided:

RFS will charge Sedili Hospital Hospital RM7 per day for each patient served. Note: This figure has been "marked up" by RFS to reflect the firm's cost of operating the hospital cafeteria.

Sedili Hospital 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%.

Labor is the primary driver for variable overhead. If an outsourcing agreement is reached, hospital labor costs will drop by 90%. RFS plans to use Sedili Hospital facilities for meal preparation.

Cafeteria sales revenue is expected to increase by 15% because RFS will offer an improved menu selection.

Required:

1. Should Sedili Hospital outsource its food-service operation to RFS based on the information given above ?

2. What factors, other than financial, should Sedili Hospital consider before making the final decision?