The General Hospital currently prepares the food for their patients: Information

Question

The General Hospital currently prepares the food for their patients: Information regarding the food preparation department is as follows: meals per week: 4400 variable cost per meal $3.75 fixed cost $12,000 per week a) A representative of the Easy-Bake Oven Company has come to you with a proposal:   rent their oven for $16,000 per week; with this state-of-the-art oven; your variable cost per meal will drop $2.95 per meal hence the new variable cost per meal will be $0.80 and the fixed costs of 12,000 drop to 8,900.   what is the break even point for the Easy-Bake-Oven? besides cost, what other factors should you consider in deciding whether or not to use the Easy-Bake-Oven? Do you recommend using the Easy-Bake-Oven? Why or why not show your work;   The General Hospital currently prepares the food for their patients: Information regarding the food preparation department is as follows: meals per week: 4400 variable cost per meal $3.75 fixed cost $12,000 per week a) A representative of the Easy-Bake Oven Company has come to you with a proposal:   rent their oven for $16,000 per week; with this state-of-the-art oven; your variable cost per meal will drop $2.95 per meal hence the new variable cost per meal will be $0.80 and the fixed costs of 12,000 drop to 8,900.   what is the break even point for the Easy-Bake-Oven? besides cost, what other factors should you consider in deciding whether or not to use the Easy-Bake-Oven? Do you recommend using the Easy-Bake-Oven? Why or why not show your work;  

Explanation / Answer

Particulars

Savings in variable costs per meal (3.75 -2.95)

0.8

Increase in fixed costs

Fixed costs after the Easy Bake oven (16000 +8900)

24900

Less: Fixed costs before

12000

Additional fixed cost per week

12900

Breakeven point (12900 /0.80)

16125 meals per week.

Apart from the costs the following factors should be considered before making final decision:

The above are the non-financial aspects that are to be considered before taking final decision.

Decision:

No the Easy-Bake oven should not be taken on rent to cook meal as the savings in variable costs is relatively less compare to the huge increase in fixed costs. Only if the General Hospital produces 16,125 meals per week then only the savings in variable costs will offset the huge increase in fixed costs. Thus, the Hospital should continue with its existing set up to cook food for its patients.

Particulars

Savings in variable costs per meal (3.75 -2.95)

0.8

Increase in fixed costs

Fixed costs after the Easy Bake oven (16000 +8900)

24900

Less: Fixed costs before

12000

Additional fixed cost per week

12900

Breakeven point (12900 /0.80)

16125 meals per week.

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