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**Show Me the Money! Worksheet 13: Management of Financial Resources**

**Scenario:** As Jim Hennessey, the foodservice director, reflects on the past few months, he is pleased to see the improvement in the Press Ganey scores for patient feeding at Memorial Hospital Food and Nutrition Services. Now, he turns his attention to the staff/visitor cafeteria. Upon reviewing his profit and loss statement, Jim notices that food costs have increased from 40% of revenue to 42.5% over the past two months.

**Recommendation:** Chef Ralph Jeffries suggests offering rotisserie chicken to increase cafeteria sales. He plans to purchase five-pound broilers at $1.08 per pound and prepare them using a rotisserie placed on the serving line. The cook will quarter the chickens in front of customers to entice them with the sight and smell. Ralph estimates selling eighty portions daily. The average labor cost is $16.00 per hour, with one hour of prep time needed per twenty chickens, plus an additional two minutes of labor per chicken quarter for serving.

**Pricing:** Using an operating margin of 52%, Ralph proposes charging $4.00 per portion. Jim questions this price since it deviates from their usual markup factor method. Additionally, he wonders if spending $12,500 on a new rotisserie will yield a return on investment.

**Meeting:** During his regular meeting with Linda Bolton, the clinical nutrition manager, Jim discusses their progress. Linda, pleased with the increasing Press Ganey scores, is focused on improving food quality for patients on modified diets. Her analysis of the heart healthy/prudent menu reveals it provides only 23% of calories from fat, not aligning with ATP III guidelines. It is also low in fiber at 20 grams. Linda recommends using olive oil and increasing fresh fruit and vegetable selections. Jim responds with, "Show me the money!"

**Tasks:**

1. What would be the effect of pricing all items using prime cost versus the factor method?

2. Calculate the NPV and payback period for the rotisserie cooker. Assume a cost of capital of 8% and a useful life of ten years.

3. What is the impact on the financial outcome of increased food costs?

4. Can increasing revenue overcome an increase in the percentage of food cost?

5. What financial impact could Linda's dietary recommendations have on food costs? How can hospital foodservice balance nutrition and cost concerns? Of the cost issues presented, which should Jim prioritize?

Answer :

Final answer:

Pricing strategies play significant roles in financial outcomes, and while increasing food costs might require a higher revenue to maintain profit margins, strategic revenue generation and well-managed costs steer financial success. The introduction of the rotisserie chicken could increase revenue while managing higher food costs by incorporating healthier alternatives. It's a balancing act that needs constant attention.

Explanation:

The effect of pricing items using the prime cost method versus the factor method would be significant. Prime cost considers both direct materials and labor costs in determining cost, potentially leading to a more precise pricing strategy. However, it can be more tedious as it takes into account details of actual expenses per item. The factor method, in contrast, simplifies the process by using an average markup percentage.

For the Net Present Value (NPV) and payback period calculation, we would first calculate the annual cash inflow from the rotisserie and then discount these inflows by the cost of capital (8 percent) over the useful life of the machine (ten years). Subtract the initial investment ($12,500) from the total discounted cash flows to obtain NPV. The payback period would be the time it takes for the cash inflows to equate to the initial investment.

When food costs increase, the overall costs of the cafeteria increase. If no adjustments are made to pricing, it will reduce the operating margin and profit. Consequently, revenue would need to increase significantly to balance out the increase in food costs. This may be achieved by attracting more customers or introducing premium-priced items.

Linda’s recommendations to switch to olive oil and increase fresh fruits and vegetables would likely increase the food costs. To balance nutrition and cost concerns, adjustments in menu pricing, optimizing portions, or looking for cost-effective suppliers may be necessary. Considering the presented issue, Jim should prioritize revenue generation, for which the introduction of the rotisserie chicken could be a solution in the short run, and cost management in the long run with a focus on Nutrition Services for health concerns.

Learn more about Food Cost Management here:

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