Part 1: Baker Consolidated
Baker Consolidated operates a cafeteria for its employees. The operation of the cafeteria requires fixed costs of $4,700 per month and variable costs of 40% of sales. Cafeteria sales are currently averaging $12,000 per month.
Baker has an opportunity to replace the cafeteria with vending machines. Gross customer spending at the vending machines is estimated to be 40% greater than current sales, because the machines are available at all hours. By replacing the cafeteria with vending machines, Baker would receive 16% of gross customer spending and avoid all cafeteria costs. In a poll, employees did not express a preference for one option over the other.
Requirements:
• How much does monthly operating income change if Baker Consolidated replaces the cafeteria with vending machines? Explain using linear profit modeling calculations.
• What recommendation would you make for Baker Consolidated’s managers considering this decision? Justify your response.
? In your recommendation, be sure to calculate how the monthly operating income changes if the company replaces the cafeteria with vending machines.
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