Titanium Business Operations (Production)

Titanium clothing sells uniforms for superheroes. Titaniums strategy is to offer a wide selection of clothing options, excellent customer service, and a premium price. Titanium presents the following data for 2015 and 2016. For simplicity, assume that each customer (superhero) purchases one piece of clothing.

Total selling and customer-service costs depend on the number of customers that Titanium has created capacity to support, not the actual number of customers that Titanium serves. Total purchasing and administrative costs depend on purchasing and administrative capacity that Titanium has created (defined in terms of the number of distinct clothing designs that Titanium can purchase and administer). Purchasing and administrative costs do not depend on the actual number of distinct clothing designs purchased. Titanium purchased 930 distinct designs in 2015 and 820 distinct designs in 2016.

At the start of 2016, Titanium planned to increase operating income by 10% over operating income in 2015.

Titanium Supporting Function (Cafeteria)

Titanium currently subsidizes cafeteria services for its 250 employees. Titanium is in the process of reviewing the cafeteria services as cost-cutting measures are needed throughout the organization to keep the prices of its products competitive. Two alternatives are being evaluated: downsize the cafeteria staff and offer a reduced menu or contract with an outside vendor.

The current cafeteria operation has five employees with a combined annual salary of $155,000 plus additional employee benefits at 25% of salary. The cafeteria operates 260 days each year, and the costs for utilities and equipment maintenance average $52,000 annually. The daily sales include 100 entr es at $7.20 each, 90 sandwiches or salads at an average price of $4.50 each, and an additional $300 for beverages and desserts. The cost of all cafeteria supplies is 62% of revenues.

The plan for downsizing the current operation envisions retaining two of the current employees whose combined base annual salaries total $94,000. An entr e would no longer be offered, and prices of the remaining items would be increased slightly. Under this arrangement, Titanium expects daily sales of 160 sandwiches or salads at a higher average price of $5.10. The revenue for beverages and desserts is expected to increase to $340 each day. Because of the elimination of the entr e, the cost of all cafeteria supplies is expected to drop to 52% of revenues. All other conditions of operation would remain the same. Titanium is willing to continue to subsidize this reduced operation but will not spend more than 20% of the current subsidy.

A proposal has been received from Delicious Foods, an outside vendor that is willing to supply cafeteria services. Delicious Foods has proposed to pay Titanium $1,300 per month for use of the cafeteria and utilities. Titanium would be expected to cover equipment repair costs. In addition, Delicious Foods would pay Titanium 8% of all revenues received above the breakeven point; this payment would be made at the end of the year. All other costs incurred by Delicious Foods to supply the cafeteria services are variable and equal 75% of revenues. Delicious Foods plans to charge $7.80 for an entr e, and the average price for the sandwich or salad would be $5.50. All other daily sales are expected to average $370. Delicious Foods expects daily sales of 70 entr es and 98 sandwiches or salads.

Required:

Titanium Support Function

5) Determine whether the plan for downsizing the current cafeteria operation would be acceptable to Titanium Corporation. Show all calculations.

6) Is the Delicious Foods proposal more advantageous to Titanium Corporation than the downsizing plan? Show all calculations.

7) Provide a recommendation given the case facts and your analysis.

2015 2016 Pieces of clothing purchased and sold Average selling price Average cost per piece of clothing Selling and customer-service capacity 40,000 $60 $40 51,000 customers $357,000 40,000 $59 $41 43,000 customers $296,700 $6.90 Selling and customer-service costs Selling and customer-service capacity cost per customer (line 5/ line 4) Purchase and administrative capacity Purchase and administrative costs Purchasing and administrative capacity cost per distinct design (line 8 / line 7) 980 designs 850 designs 204,000 $240 per design 245,000 $250 per design