The Mead Meals on Wheels Center (MMWC) provides two meals per day to the homebound elderly. The Town of Millbridge pays MMWC $32 per week for each person it services for the week. Each person receives 14 meals for the week. There is no shortage of demand for MMWCs services among the elderly citizens of Millbridge and MMWC can find qualified recipients for as many meals as it can deliver. To service the contract, MMWC has a central kitchen which can produce a maximum of 9,600 meals per day. It costs MMWC an average of $36,000 per week to operate the kitchen and MMWCs other central facilities regardless of the number of meals that MMWC serves. This covers all of MMWCs fixed costs (i.e., rent, equipment costs, and its personnel including administrative staff) as well as its fixed contract costs (e.g., utilities, snow removal). 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 MMWCs only variable expense. You are MMWCs only financial analyst and your boss has asked you to decide what to do. Problem 2 Using your work to define MMWCs spending limit, the executive director prepared a request for bids and sent it to all of the food purveyors in and near Millbridge. The best bid came in at $.50 below the number that you have calculated as MMWCs break-even per person-week. Using this bid and the information given in the preceding problem, the director wants you to prepare a budget for MMWC in a format that will allow her to monitor MMWCs performance on a quarterly basis for the coming year. For budgeting, the director has told you to assume that there are 13 weeks in each quarter. You know from your experience that the fixed expenses for the organization vary by season. Fixed costs average $38,000 per week in the winter (first quarter), $34,000 per week in the second quarter, $35,000 in the third quarter, and $37,000 in the fourth quarter. CASE STUDY Mead Meals on Wheels CenterPart II13 Problem 3 During the year, you analyzed Mead Meals on Wheels Centers (MMWCs) kitchen operations and determined that MMWC could increase the capacity of the kitchen to 10,400 meals per day. You see a chance to increase the number of meals that MMWC can deliver to the elderly as well as a way to increase your weekly revenue. However, expanding the kitchens capacity will require you to purchase $625,000 worth of equipment. The equipment has a useful life of five years. Just as you started your analysis of the expansion, a food purveyor from outside the Millbridge city limits responded to MMWCs request for bids and gave the Center a bid that was $.75 per person-week below the quote that was used in your original budget. That is a full $1.25 below the break-even level that you calculated. The executive director is interested in any idea that will expand service delivery, but she is concerned about being able to pay for the equipment. She tells you that MMWCs cost of capital is 12 percent. She has instructed you to use the new food bid as your cost per person-week for food. She only wants to buy the new equipment if it generates enough additional contribution to pay for itself, taking into account the time value of money. Problem 4 You finish your capital budget analysis just in time to prepare the operating budget for the coming year. The executive director wants you to use the previous years budget as a starting point. Cold weather and snow in this years first quarter of operation caused MMWC to exceed the limits of its snowplowing and heating-oil contracts. As a result, MMWCs fixed costs were $2,000 per week above what you had forecasted. To be conservative, the executive director wants next years budget to reflect these higher first-quarter fixed costs. In addition, she has decided to accept your recommendation about the kitchen equipment. A local bank has offered to lend MMWC the full purchase price of the equipment and not require the center to repay any principal during the first year of the loan. Interest on the loan would be set at 12 percent per annum. MMWCs normal policy is to assume a 10 percent residual or salvage14 value on all kitchen equipment and to depreciate it over five years on a straight-line basis.15 Assignment Operational Analysis Read Case Study Mead Meals on Wheels CenterPart I and Part II . Using the information in the case study problems, especially Problem 3 (from Part II) answer the following question. If MMWC buys the equipment to expand their services, will that expansion have a positive financial impact? Support your recommendation and present your findings in a way that the director will understand. Compute the volume, mix, and price revenue variances. How did things turn out for the group considering just revenues? How did they turn out from a profit perspective? Use either the approach from chapter 8 or from Appendix 8-A to solve. Clearly label the calculations of the required variances using Excel. Use formulas to calculate the three variances and format the cells to insert a comma if there is more than three numbers and round to the nearest whole number. Explain the meaning of the variances in a two page Word document.
