¶ … Mead Meals

Problem 1 is a variation on the break-even problem. It asks you to calculate the maximum amount that MMWC can spend per person per week on food. In other words, what is the largest variable cost that MMWC can afford to pay and still cover all of its fixed costs?

From the problem set you know the Unit Revenue (P) is $32 per week. To find out how many people MMWC can feed in a week (Q), you have to do a little work. The problem set says that MMWC can prepare 9,600 meals per day. But its contract calls for it to deliver two meals per day per person. This means that MMWC can feed 4,800 people on any given day. Note that each person eats 14 meals per week, so MMWC can feed only 4,800 people per week. Fixed costs (FC) are $36,000 per week.

The base break-even formula is:

multiplying both sides of the equation by, we get:

expanding the terms on the left side, we get:

subtracting from both sides, we get:

multiplying both sides by -- 1, we get:

substituting the values above, we get:

$24.50 PER PERSON WEEK is the maximum amount that MMWC can spend for food.

Problem 2 asks you to take the information from problem 1 along with some additional data on the seasonality of MMWC's fixed costs and add the fact that the lowest food supply bid was $.50 below the break-even level that was calculated in problem 1. The budget below was derived from the problem-set facts as follows.

Quarterly revenue equals the number of people served per week (4,800) times the number of weeks in a quarter (13) times the amount that Millbridge pays MMWC for each person-week ($32). Thus quarterly revenue = $1,996,800

Quarterly fixed expenses: The problem set tells us that fixed costs vary by quarter. They are $38,000 per week in the winter (1st quarter), $34,000 per week in the second quarter, $35,000 in the third quarter and $37,000 in the fourth quarter. The calculations for quarterly fixed costs involves multiplying the weekly fixed costs per quarter by the number of weeks in a quarter. For the first quarter that is $38,000 13, or $494,000.

Quarterly variable food costs are calculated by multiplying the number of people fed (4,800) by the number of weeks in a quarter (13) by the cost of the food ($24.50 -- $.50 $24.00). This is equal to $1,497,000.

Budget

Quarter One

Quarter Two

Quarter Three

Quarter Four

Annual Total

Revenue

$1,996,800

$1,996,800

$1,996,800

$1,996,800

$7,987,200

Fixed Costs

494,000

442,000

455,000

481,000

1,872,000

VC Food

1,497,600

1,497,600

1,497,600

1,497,600

5,990,400

Total Cost

$1,991,600

$1,939,600

$1,952,600

$1,978,600

$7,862,400

Profit/(Loss)