Tom opened a food catering service in downtown Vancouver two years ago. The place is essentially made up of a sit-down area with service and a daily menu for lunch and dinner while the back of the place is mainly for catering service. Tom is contemplating some important business decisions for the catering service and came to you for assistance in determining what costs are relevant to making these decisions. SITUATION 1 - MAKE OR BUY A PRODUCT Tom has been approached by Fast Bakery and they indicated that they could bake all the 150 loaves of bread he needs daily for a cost of $1.15 per loaf of bread. tom is considering this offer as load bread is very time-consuming. They take on average 3 hours of his time to make each morning. He feels that he could use this time to make some pies and quiche that can be sold during lunch. Fast Bakery has provided the cost sheet below: Offer from Fast Bakery: To bake 150 lloaloaf breadh days at $1.15 per unit. A daily delivery charge of $40 would be applied. Any change to the quantity ordered needs to be communicated at least 48 hours in advance. A change in the order quantity would result in a $15 administrative charge. The current terms are valid for 1 year, at which point the contract can be renegotiated. The current direct material of making each loaf is $0.95. The variable costs associated with the croissants are estimated at 10 cents per loaf. Tom is not paid on an hourly basis, so cutting the loaf line would not affect the salary expense. Tom also indicated that the loaf use a special oven which Tom believes that he could make 25 pies with the time he would save by no longer making loaf. On average, the pies would provide a profit of $3.5 per pie. Tom is very excited about this opportunity as he feels that making pies allows him to be much more creative than making loaf. REQUIRED: 1. Identify the relevant costs to the make or buy decision of the loaf. Prepare a computation to identify the gain / loss that would result from outsourcing the loaf production to Fast Bakery. 2. What qualitative factors would you consider in this decision? SITUATION II: KEEP OR DROP A PRODUCT / SEGMENT For the past two years, Tom has been operating an online platform through their website that allows customers to place orders online and have the food delivered to them within 45 minutes. The orders are then prepared in the same kitchen by the same staff operating the restaurant. The order is then delivered by a delivery person with the Tom's motorcycle that was purchased for this segment. The online delivery platform is managed from a small office located at the back of the restaurant. Tom's manager, Mr. Louis, is considering dropping this segment as he believes it is not profitable. The maintenance of the IT platform has been expensive, and he also believes that the online orders take up a significant portion of his time while making up a small portion of the revenues. Louis believes his time could be put to better use with other projects and initiatives for the Tom as well as managing the current operations. Louis indicates that staff turnover has been higher this past year and he feels partly responsible as he has not been able to be very involved with supervising and coaching the staff. The feedback on the online the platform has been good and he noted that many new customers of the caf indicated that they discovered the caf after they saw the website and ordered delivery from the online platform. Louis provides you with the following financial information from Tom's Cater and asks you to help him decide whether they should keep or drop the online delivery segment. Additional information about the restaurant and the online delivery segment is provided on the next page. REQUIRED: 1. Identify the relevant costs to the keep or drop decision and prepare a computation of the loss/gain that would result from dropping the online segment. 2. What qualitative factors would you consider in this decision? FINANCIAL INFORMATION - Tom's Catering Catering Caf Online Order/Delivery Total Sales $ 1,125,000 $ 365,000 $ 150,000 $ 1,640,000 Variable Costs $ 689,000 $ 205,000 $ 120,000 $ 1,014,000 Contribution Margin $ 436,000 $ 160,000 $ 30,000 $ 626,000 Fixed Expenses Salaries $ 189,250 $ 25,600 $ 12,000 $ 226,850 Advertising $ 7,500 $ 500 $ 500 $ 8,500 Utilities $ 18,375 $ 3,675 $ 2,500 $ 24,550 Depreciation $ 41,250 $ 8,250 $ 5,500 $ 55,000 Insurance - Building $ 9,000 $ 1,800 $ 1,200 $ 12,000 Manager Salary $ 42,000 $ 10,500 $ 15,000 $ 67,500 IT Maintenance $ 20,000 $ 20,000 Profit $ 128,625 $ 109,675 $ (26,700) $ 211,600 Notes: The Salaries and Advertising expenses are direct and traceable costs of each segment. Another common fixed cost was allocated based on the proportion of the square footage of the building occupied by each segment. Managers''breads salary is fixed and their compensation has been allocated to each segment IT Maintenance is only needed for the online service, and it can be avoided.