$3,832,500/2,555,000 = $1.50 fixed cost per meal
$3,832,500/2,190,000 = $1.75 fixed cost per meal
variable cost per meal
$5.55 per meal
I would expect the other seven hospitals to be concerned that the price per meal had
In addition, they would probably be concerned that quality of the meals might
More of them may seek to purchase their meals from outside suppliers.
The problem with the new price is caused by Omar-Chef having excess (or unused)
capacity and the associated excess fixed costs.
A death spiral can be a result, but not
$3,832,500/3,650,000 = $1.05 fixed cost per meal at practical capacity
Excess capacity cost = ($1.05) (3,650,000 - 2,555,000) = $1,149,750
The cost of unused capacity will increase as less meals are prepared and delivered to the
remaining seven hospitals.
Excess capacity cost = ($1.05) (3,650,000 - 2,190,000) = $1,533,000