Labor Variance and the Bakery Make-vs-Buy Question at a University
A university dining program serves 4,200 meal equivalents per day with an $8.6 million annual operating budget. Labor is budgeted at 36% of revenue but is running at 43%; overtime equals 11% of paid hours. The scratch bakery uses 1,400 labor hours per month and $210,000 in ingredients annually, and carries $180,000 in allocated overhead. A vendor quotes fully prepared muffins at $0.72 each delivered; the in-house cost is $0.86 each when labor and overhead are included. Annual muffin volume is 240,000 units. Closing the bakery would displace six senior staff with union bumping rights into other departments and would remove a selling point used in campus marketing. The CFO asks whether outsourcing the bakery solves the labor variance and wants a recommendation before the next budget cycle.
1. Quantify the labor variance and the direct muffin make-vs-buy savings. What costs are missing from the comparison?
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Budgeted labor is 36% of $8.6 million, or $3.096 million. Actual labor at 43% is $3.698 million, so the variance is about $602,000 unfavorable, assuming revenue is fixed at $8.6 million. If revenue is not fixed, labor percentage alone is misleading and labor dollars per meal equivalent should also be examined.
The muffin comparison favors the vendor by $0.14 per unit. At 240,000 units, that is $33,600 per year. That is only about 5.6% of the labor variance, so outsourcing muffins cannot by itself solve the problem.
The comparison is also incomplete. The in-house $0.86 includes allocated overhead, which may not be avoidable if the bakery closes; only avoidable costs should be counted. Conversely, the vendor price may exclude delivery constraints, emergency orders, storage, quality checks, and menu changes. Closing the bakery may create severance, equipment write-offs, and lost revenue if the scratch bakery is a marketing draw. Union bumping may move labor cost into other departments rather than eliminate it. A defensible analysis compares avoidable in-house cost with fully delivered vendor cost, then adds stranded costs and revenue effects.
2. Recommend a course of action that addresses the labor variance without assuming the bakery is the cause. Include sequencing and metrics.
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Do not close the bakery on the muffin comparison alone. First, decompose the $602,000 variance by department, shift, and driver: overtime, absenteeism, vacancies, scheduling, production planning, and menu complexity. Overtime at 11% of paid hours is a large, addressable signal. Second, set a six-month target such as reducing overtime to 5% and labor to 39% to 40%, with weekly tracking of meals per labor hour, overtime dollars, absence rate, and agency or temporary labor.
Third, test outsourcing selectively. Run a 12-week vendor trial for one or two bakery items with high volume and low differentiation, while retaining scratch production for signature items. Compare quality, waste, delivery reliability, and total cost, not just unit price. Fourth, negotiate with the union on scheduling and cross-training before displacement decisions.
Fifth, if the bakery still cannot meet a fully loaded cost target, present a phase-out plan with severance, bumping impacts, and customer communication. Metrics for the decision should include labor cost per meal equivalent, overtime percentage, food cost, waste, customer satisfaction, and units produced per labor hour. The CFO should see a labor plan, not a single make-vs-buy answer.