St. Joseph Hospital has been hit with a number of complaints about its food service from patients, employees, and cafeteria customers. These complaints, coupled with a very tight local labour market, have prompted the organization to contact Nationwide
Institutional Food Service (NIFS) about the 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, $890,000; labour, $85,000; variable overhead, $35,000; allocated fixed overhead, $60,000; and cafeteria sales revenue, $80,000.
Conversations with NIFS personnel revealed the following information.
▪ NIFS will charge St. Joseph Hospital $14 per day for each patient served. Note: This figure has been "marked up" by NIFS to reflect the firm's cost of operating the hospital cafeteria.
▪ St. Joseph's 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%.
▪ Labour is the primary driver for variable overhead. If an outsourcing agreement is reached, hospital labour costs will drop by 90%. NIFS plans to use St. Joseph facilities for meal preparation.
▪ Cafeteria sales revenue is expected to increase by 15% because NIFS will offer an improved menu selection.
Required:
A. What is meant by the term "outsourcing"?
B. Should St. Joseph outsource its food-service operation to NIFS?
C. Factors to consider would include improvement in food quality, reliability of NIFS, elimination of labor problems, and data validity in future years.

Question

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The Answer of St. Joseph Hospital has been hit with a number of complaints about its food service from patients, employees, and cafeteria customers. These complaints, coupled with a very tight local labour market, have prompted the organization to contact Nationwide
Institutional Food Service (NIFS) about the 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, $890,000; labour, $85,000; variable overhead, $35,000; allocated fixed overhead, $60,000; and cafeteria sales revenue, $80,000.
Conversations with NIFS personnel revealed the following information.
▪ NIFS will charge St. Joseph Hospital $14 per day for each patient served. Note: This figure has been "marked up" by NIFS to reflect the firm's cost of operating the hospital cafeteria.
▪ St. Joseph's 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%.
▪ Labour is the primary driver for variable overhead. If an outsourcing agreement is reached, hospital labour costs will drop by 90%. NIFS plans to use St. Joseph facilities for meal preparation.
▪ Cafeteria sales revenue is expected to increase by 15% because NIFS will offer an improved menu selection.
Required:
A. What is meant by the term "outsourcing"?
B. Should St. Joseph outsource its food-service operation to NIFS?
C. Factors to consider would include improvement in food quality, reliability of NIFS, elimination of labor problems, and data validity in future years.

St Joseph Hospital Has Been Hit with a Number of Complaints