The Mead Meals on Wheel Center provides two meals per day to the home bound elderly.

The town of Millsbridge pays MMWC $32 dollars per week for each person its services for the week. Each person receives 14 meals for the week. There is no shortage of demand for MMWC services among the elderly citizens of Millsbridge 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 9600 meals per day. It cost MMWC anaverage of 36,000 per week to operate the kitchen and MMWC other central facilities regardless of the number of meals that MMWC serves. This covers all of MMWC’s fixed cost ( 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 MMWC’s only variable expense. You are MMWC only financial analysis and your boss has asked you to decide what to do.

Mead Meals on Wheel Center-Part II ( page 208)

During the year, you analyzed Mead Meals on Wheels Center’s 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 kitchen’s 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 MMWC’s request for bids and gave the center a bid that was $ .75 per-person-week 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 MMWVC’s cost of capital is12 percent. She has instructed you to use the new equipment if it generates enough additional contribution to pay for itself, taking into account the time value of money.

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 year’s budget as a starting point. Cold weather and snow in this year’s first quarter of operationcaused MMWC  to exceed the limits of its snow plowing and heating oil contracts. As a result MMWC fixed costs were $2,000 per week above what you forecasted. To be conservative, the executive director wants next year’s budget  to reflect these higher first-quarter fixed costs.

In addition she has decided to accept your recommendationsabout 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 will be set at 12 per cent per annual. MMWC normal policy is to assume a 10 per cent residual or salvage value on all kitchen equipment and to depreciate it over five years on a straight line basis.