The manager of a local pub is considering adding a healthier option to the menu in the form of a veggie plate with hummus. There are two options with the price to the customers the same. The make in-house option is to buy local produce from a local farmer’s market and have the staff assemble the veggie plates. This would require some special prep space, equipment, etc. and a part-time prep cook would need to be hired. The pub manager estimates the fixed costs of this option at $12,000 and variable costs at $1.50 per veggie plate. The buy (or outsource) option is to contract with a local supplier and get preassembled veggie plates for $2 per plate. This however, would require a new refrigerator to hold the preassembled plates at an annual fixed cost of $2,400. At how many veggie plates sold does it still make sense to install the equipment and make the plates in house? To get them from a supplier? How many plates must be sold to make the manager indifferent across the make or buy options? -->

Introduction

In the competitive hospitality industry, menu diversification with healthy options can attract a broader customer base and enhance the establishment's reputation. The decision to add a veggie plate with hummus involves analyzing the production costs and determining the most cost-effective method for supplying this item. The core objective is to compare the in-house production approach with outsourcing, and identify the break-even sales volume at which both options incur equivalent costs, allowing the manager to make an informed decision based on projected sales volumes.

Cost Analysis of the Make Option

The in-house made veggie plate involves fixed and variable costs. The fixed costs are estimated at $12,000, which include expenses such as facility modifications, equipment, and hiring a part-time prep cook. The variable cost per unit is $1.50, covering ingredients and minor operational expenses associated with each plate. The total cost for producing 'x' plates in-house can be expressed as:

Cost_make = Fixed Costs + Variable Cost per Plate × Number of Plates

or

C_make = $12,000 + $1.50 × x

Cost Analysis of the Buy (Outsource) Option

The outsourcing approach involves contracting with an external supplier that provides preassembled veggie plates at $2 each. Additionally, there is a fixed annual cost of $2,400 for a new refrigerator to store these premade plates. The total cost for 'x' plates in this scenario is:

Cost_buy = Fixed Costs + Variable Cost per Plate × Number of Plates

C_buy = $2,400 + $2.00 × x

Determining the Break-Even Point

To find the number of plates 'x' where the in-house and outsourced options cost the same (i.e., the point of indifference), set the two equations equal:

$12,000 + $1.50 × x = $2,400 + $2.00 × x

Solving for 'x':

$12,000 - $2,400 = $2.00 × x - $1.50 × x

$9,600 = $0.50 × x

x = $9,600 / $0.50 = 19,200

This calculation indicates that if the projected sales are below 19,200 plates annually, it is more cost-effective to produce in-house; if sales exceed this volume, outsourcing would be preferable.

Interpreting the Results and Strategic Implications

The high break-even volume of 19,200 plates suggests that unless the pub expects to sell an exceptionally large number of veggie plates annually, it might be economically advantageous to outsource. Typically, local pubs estimate their potential sales based on customer footfall, menu popularity, and seasonal trends. If the projected sales are significantly lower, investing in in-house facilities may not be justified, given the fixed costs.

Conversely, if sales are expected to approach or exceed this threshold, establishing in-house preparation can lead to cost savings in the long term, especially if fixed costs are spread over large volumes. Moreover, in-house production may offer benefits such as product customization, freshness, and quality control, which could enhance customer satisfaction and loyalty—factors not directly captured in the cost analysis.

Additional Considerations

While the quantitative analysis provides critical insights, other qualitative factors should influence the decision. These include the availability of space for prep equipment, staffing capabilities, supplier reliability, and potential logistical challenges. Additionally, market trends favoring organic, local, and fresh ingredients could favor the in-house option despite higher setup costs. Customer preferences and marketing strategies could further tilt the decision in favor of one approach over the other.

Furthermore, the analysis assumes constant costs and sales volume; fluctuations could significantly impact the actual cost-effectiveness. Sensitivity analysis, considering variations in sales volume and costs, would provide a more comprehensive view, enabling better risk assessment.

Conclusion

The analysis reveals that producing veggie plates in-house becomes economical only when projected annual sales reach approximately 19,200 plates. Below this volume, outsourcing preassembled plates is financially advantageous due to lower fixed costs and comparable variable costs. Beyond this threshold, the in-house approach offers potential cost savings, especially if the pub anticipates high demand. Therefore, the pub manager should evaluate expected sales, capacity, and strategic goals before making the final decision. Incorporating both quantitative and qualitative factors ensures a balanced approach that aligns operational capabilities with market opportunities.

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