Chapter 9 Case Study: Mead Meals On Wheels ✓ Solved

Chapter 9 case Study Mead Meals On Wheelsthe Mead Meals On Wheels Cente

Chapter 9 case Study Mead Meals on Wheels The Mead Meals on Wheels Center (MMWC) provides meals every day to the homebound elderly. The city of Wabash pays MMWC $32 per week for each person it serves. There is no shortage of demand for MMWC’s services among the elderly citizens of Wabash, and MMWC can find qualified recipients for as many meals as it can deliver. Each person helped by MMWC receives two hot meals per day, seven days per week, for a total of 14 meals every week. To service the contract, MMWC has a central kitchen that has the capacity to produce a maximum of 9,600 meals per day.

It costs MMWC an average of $36,000 per week to operate the kitchen and other central facilities regardless of the number of meals that MMWC serves. This covers all of MMWC’s fixed costs (e.g., rent, equipment costs, and its personnel including administrative staff) as well as its fixed seasonal service contract costs (utilities, snow removal, etc.). The first problem that MMWC faces is figuring out how much it can afford to spend per person, per week for food to supply the program. Food is MMWC’s only variable expense. You are MMWC’s only program analyst.

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The primary goal for MMWC is to determine its per-person weekly food expenditure to break even. This calculation hinges on understanding the total fixed costs, variable costs, and capacity constraints. To begin, we analyze fixed costs and capacity to define the maximum number of meals that can be economically served, along with the associated costs.

Fixed weekly costs are $36,000, covering all non-variable expenses such as rent, equipment, and salaries. The maximum capacity of meals per day is 9,600, equating to 67,200 meals weekly (assuming operation every day), but since each recipient receives 14 meals weekly, the capacity in terms of persons served is 4,800 (i.e., 67,200 / 14). Since there is no demand shortage, MMWC can potentially serve all qualified recipients within the capacity.

To determine the break-even food cost per person per week, we need to allocate fixed costs across the number of persons served. Let P represent the total number of persons served weekly; then, the total fixed costs per person is $36,000 divided by P, and the revenue per person per week is $32, as paid by Wabash. For breakeven, total revenue must equal total costs (fixed plus variable).

Hence, the variable food cost per person per week should be calculated as follows:

Total fixed costs per week = $36,000

Assuming maximum capacity and full utilization of resources, total persons served per week = 4,800 (based on capacity). Therefore, fixed costs per person per week = $36,000 / 4,800 ≈ $7.50.

The total amount MMWC can spend per person per week, including food costs, to break even is equal to the revenue of $32 minus fixed cost per person ($7.50), which is approximately $24.50. Given that food is the only variable expense, MMWC cannot afford to spend more than $24.50 per person per week on food to break even.

However, the bid received from food providers is $0.50 below the break-even figure, which indicates potential cost savings but also risks if costs rise or demand exceeds capacity. Using this lowest bid, the weekly food expenditure per person would be approximately $24.00.

In conclusion, MMWC’s spending limit per person per week on food to maintain break-even operations is approximately $24.50. Cost control and efficiency in food procurement are essential to sustain operations given the fixed costs and capacity constraints.

References

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