1,500 $75,000 $(5,000) From the perspective of university management, is the uni
ID: 2552235 • Letter: 1
Question
1,500
$75,000
$(5,000)
From the perspective of university management, is the university surcharge a relevant cost in deciding whether to close the Lair? Why or why not?
Identify possible ways that operations could be modified so that some of the fixed costs become variable costs.
Given the Lair’s cost function and operating leverage, describe possible benefits of modifying operations so that some of the fixed costs become variable costs.
From the perspective of university management, describe the pros and cons of closing the Wildcat Lair.
Suppose you are the manager of the Wildcat Lair. Write a memo to persuade the university management to keep the club open.
Revenue $70,000 Expenses Purchases of prepared food $21,000 Serving personnel 30,000 Cashiers 5,500 Administrative 10,000 University surcharge 7,000 Utilities
1,500
$75,000
Loss$(5,000)
The Lair purchases prepared food directly from University Food Services. This charge varies proportionately with the number and kind of meals served. Personnel paid by the Lair serve the food, tend the cash register, bus and clean tables, and wash dishes. The staffing levels rarely change; the existing staff can usually handle daily fluctuations in volume. Administrative costs are primarily the salaries of the manager and her office staff. Because the university provides support services for the Lair, such as payroll, human resources, and other administrative support, the university charges a surcharge of 10% of its revenues. Utility costs are the costs of cooling, heating, and lighting during its normal operating hours.
The university’s management is considering closing the Wildcat Lair because it has been operating at a loss.
Explanation / Answer
1) Both Administrative Cost & University Surcharge are major expenses - about 24.2% of the total revenue. These costs can be scaled down. If the Lair outsources administrative functions, then maybe such terms can be negotiated with the University to provide the Admin services included in the Lair's P/L. Either of those expenses should be curtailed or subsumed in the other.
2) Serving personnel salaries is 42.8% of the total revenue. The requirement of serving staff is directly proportional to the University operations. The staff should be hired on per week/ per hour shifts. Ample part time labour supply would be available on campus itself.
3) (a) Convert administrative staff and University surcharge into one functional unit and negotiate on per hour charge basis volume of transactions and servers on board.
(b) Hire temporary servers in times of increased demand.
4) Pros of closing Lair:
a)Directly purchasing outside food will cost $21k as opposed to keeping the Lair open at $77k
b) the space can be rented out ans revenue earned
Cons of closing Lair
a) $7k cost transfer shall have to be absorbed in University Management books
b) Additional costs of purchasing and serving food, if any.
c) Staff and student dissatisfaction
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