Question

Company A can order meals for its employees from a catering company or prepare meals on-site. Use the information in the exhibit to complete the following items.

Dear Kim,

We are considering hiring a catering company. Currently, we are preparing meals for employees. The following is the cost of preparing a meal:

Food	$3.00
Labor	2.00
Fixed overhead	1.00
Total	$6.00

The caterer has quoted a price of $5.50 per meal. Please help us to determine whether we should buy meals from this catering company.

Best,

Taylor

Which option is less expensive?

Assume in addition that the rent of a kitchen for preparing meals is $200 per day, one meal is served to each employee per day, and the company has 100 employees. What is the maximum price the company should pay for a catered meal?

Answer 1

Solution: Option A: To prepare meals

Cost = Food + Labor = $3 + $2 = $5 per meal

Fixed overhead cost is irrelevant.

Option B: To hire a caterer

Cost = $5.50 per meal

Option A i.e. preparing meals is less expensive.

Calculation of maximum price the company should pay for a catered meal:

Food	$3
Labor	$2
Fixed overhead	Irrelevant
Rent of a kitchen ($200 / 100)	$2
Maximum Price	$7 per meal

_{Please rate positive and comment in case of any doubt. I would be happy to help you further.}