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QUESTION 3 KUNTUM HOSPITAL has been hit with a number of complaints about its food service from its patients, employees and visitors. These complaints, couples with a very tight local labour market, have prompted the management to contact Healthy Food Service (HFS) about the possibility of an outsourcing arrangement. Kuntum Finance Department has provided the following information for the food service for the year just ended: Food cost Labour cost Variable Overhead Allocated fixed overhead Net Income RM 890,000 RM 85,000 RM 35,000 RM 60,000 RM 80,000 . Initial discussion with HFS personnel revealed the following information: HFS will charge Kuntum Hospital RM14 per day for each patient served. Kuntum 250 bed facility operates throughout the year and typically has an average occupancy rate of 70%. Labour is the primary driver for variable overhead. If an outsourcing agreement is reached, hospital labour costs will drop by 90%. HFS plans to use Kuntum's facilities for meal preparation. Cafeteria net income is expected to increase by 15% due to improved menu selection offered by HFS. Required: a. Define the following terms (i) Differential cost Opportunity cost (iii) Outsourcing (6 marks) b. Should Kuntum outsource its food-service operation to HFS? Show your calculation. (13 marks) c. Briefly explain 3 other non-financial factors Kuntum should consider before making the final decision. (6 marks) [Total: 25 marks]

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