Question

The Red Cross has a cafeteria in its headquarters that serves lunch to its employees five days a week. The cafeteria typically serves 500 lunches per day, 5 days per week, although it has the capacity to serve at least twice as many before it would have to invest in new equipment or hire new employees. The cost for the equipment and cafeteria employees is $180,000 per year. The cafeteria’s food costs for each meal served are $1.00, and the cafeteria charges $2.50 per meal. An elementary school next door has heard about the cafeteria and offers to send 200 students a day to the cafeteria and pay the Red Cross $1.50 for each student meal. Should the Red Cross take this offer? Why or why not? (6 points)

Answer 1

Assumptions:

1. There are 52 Week i.e. (52*7) 364 days in a year

2. The student will also do lunch for 5 days in a week

Particular	Before the accept offer of students	After the accept offer of student
Total no of lunch in a year (no of lunch in a day * 5 days in a week*No of week in a year)	(500*5*52) 1,30,000	((500+200)*5*52) 1,82,000
Total Revenue (Total no of lunch* rate of lunch)	(1,30,000*2.5) 3,25,000	(1,30,000*2.5)+((1,82,000-1,30,000)*1.5)i.e. (3,25,000+78,000) 4,03,000
Total Fixed expenses	1,80,000	1,80,000
Total food cost (Total no of lunch*cost of each meal)	(1,30,000*1) 1,30,000	(1,82,000*1) 1,82,000
Total profit (Total revenue-Total fixed cost-Total food cost)	(3,25,000-1,80,000-1,30,000) 15,000	(4,03,000-1,80,000-1,82,000) 41,000

As per above working we can say that the offer can be accepted because the profit in case of offer not accepted is $15,000 and if offer accepted then the profit is $41,000.

Note : As mentioned in the question that the cafeteria has the capacity to serve at least twice of the existing serving, so the cafeteria has not required invest in the equipment and labour charges for acceptance of offer as the cafeteria has capacity to serve at least 1,000 (500*2) lunch per day.