The Canteen Contract Break-Even
An office with 1,800 employees must choose a canteen vendor for a 12-month contract. Vendor X charges a fixed retainer of ₹1,80,000 per month plus ₹42 per meal served. Vendor Y charges no retainer but ₹58 per meal, and requires the office to buy equipment worth ₹3,60,000 upfront; the equipment has no resale value at year-end. Current average volume is 36,000 meals per month. The contract is for 12 months, and the equipment cost should be treated as a monthly equivalent. The office wants to compare the vendors on total monthly cost, not on per-meal price alone, because the fixed and equipment components change the ranking at different volumes. A vendor representative argues that Y must be cheaper because it has no retainer; the finance team is not convinced.
1. Calculate the monthly break-even meal count between X and Y, treating the equipment cost as spread evenly over 12 months. Which vendor is cheaper at the current 36,000 meals?
Read the worked answer
Monthly equivalent of Y's equipment cost = ₹3,60,000/12 = ₹30,000. Set X = Y: 1,80,000 + 42Q = 58Q + 30,000 → 1,50,000 = 16Q → Q = 9,375 meals/month. At 36,000 meals: X = 1,80,000 + 42×36,000 = ₹16,92,000; Y = 58×36,000 + 30,000 = ₹21,18,000. X is cheaper by ₹4,26,000 per month at current volume.
2. A 20% fall in footfall is forecast. Does the choice change? What is the margin of safety in meals per month?
Read the worked answer
A 20% fall gives 28,800 meals. X = 1,80,000 + 42×28,800 = ₹13,89,600. Y = 58×28,800 + 30,000 = ₹17,00,400. X remains cheaper by ₹3,10,800. Margin of safety = 28,800 − 9,375 = 19,425 meals per month. The choice does not change unless volume falls below about 9,375.
3. Vendor Y offers to waive the equipment cost if the office guarantees a minimum of 12,000 meals per month. Should the office accept? Compare with X at that minimum and explain the risk.
Read the worked answer
At the 12,000-meal guarantee, Y's equipment cost is waived, so Y = 58×12,000 = ₹6,96,000; X = 1,80,000 + 42×12,000 = ₹6,84,000. X is still cheaper by ₹12,000 per month, so the guarantee does not make Y attractive at that volume. Without the waiver, Y's break-even is 1,80,000 = 16Q → 11,250 meals; even then X is cheaper above 11,250. The guarantee mainly transfers demand risk to the office: if actual meals fall below 12,000, the office may pay for unused meals. Reject unless Y also lowers the per-meal rate.