Local 635 represents kitchen workers at hotels in several southern cities. Part of their labor agreement states that workers “shall receive one free meal per shift up to a cost of $12, with any cost over $12 being deducted from wages paid to said employee.”
A labor dispute arose at the Riverside Hotel shortly after it was opened in June. Kitchen workers who ate dinner on the late shift found that their wages were reduced by $10 for each meal they consumed at the hotel during their dinner break. Josh Parker, a line cook, stated the widely held belief of the workers. “There’s no way these dinners cost the Riverside Hotel $12 to make, let alone $22. This is just another case of management trying to rip us off. Take last night. I had the prime rib dinner. The piece of meat cost about $7 and the salad less than $1. That’s only $8 in total. Really, there aren’t any other costs to speak of. The cook, well, he’s going to be working in the kitchen and getting paid for 8 hours whether he makes my meal or not. This claim that my meal cost $22 is baloney!”
Management of the Riverside Hotel sees the situation differently. Take the case of Josh’s dinner. In presenting the hotel’s case to a labor arbitration board, Sandy Ross, manager of the hotel, explained, “Look, that dinner goes for $32 on the menu so assigning a cost of $22 represents a very good value to the kitchen workers. The contention that the meal only costs $8 is nonsense. True, the meat costs $7 and the salad ingredients cost $1, but there’s also the labor costs related to preparing the meal and the numerous over- head costs, like the cost of the oven that the prime rib is cooked in. That oven cost more than $20,000. And there’s heat, light, power, etc. Each meal we prepare should be assigned part of these over- head costs. And don’t forget that when the worker finishes his or her meal, someone has to clean up. That costs money too. When you add up all of these items, a prime rib dinner easily adds up to $22!”
a. List examples of costs at the Riverside Hotel that are variable, fixed, and sunk. Provide an example of an opportunity cost.
b. What is the source of conflict between labor and management? What changes would you recommend in the wording of the labor agreement?