Analysis of Mixed Costs in a Pricing Decision

Christine Dandra owns a catering company that serves food and beverages at exclusive parties and business functions. Dandra's business is seasonal with a heavy schedule during the summer months and holidays and a lighter schedule at other times.

One of the major events that Dandra's customers request request is a cocktail party.She offers a standard cocktail party and has estimated the cost per guest for this type of party as follows:

Food and beverage................................................$20.00

Labour (0.5 hour at $16.00 per hour)......................8.00

Overhead (0.5 hour at $20.50 per hour)............ 10.25

Total cost per guest................................................$38.25

This standard cocktail party lasts three hours, and Dandra hires one worker for every six guests, which is one half-hour of labour per guest. These workers are hired only as needed and are paid only for the hours they actually work.

Dandra ordinarily charges $50 per guest. She is confident about her estimates of the costs of food and beverages and labour but is not as comfortable with the estimate of overhead cost.The $20.50 overhead cost per labour-hour was determined by dividing total overhead costs for the past 12 months by total labour-hours for the same period. Monthly date concerning overhead costs and labour-hours appear below:

Labour Overhead

Month Hours Costs

January...............................................1,500 $48,500

February.............................................1,560 48,050

March..................................................1,800 53,000

April.....................................................2,520 56,470

May......................................................2,700 59,160

June....................................................3,300 62,680

July......................................................3,900 65,270

August.................................................4,500 67,650

September..........................................4,200 66,200

October...............................................2,700 59,940

November...........................................1,860 54,710

December........................................3,900 64,390

Total.............................................. 34,440 $706,020

Dandra has received a request to bid on a 200-guest fundraising cocktail party to be given next month by an important local charity. The party would last the usual three hours. She would like to win this contract because the guest list for this charity event includes many prominent and influential individuals from the local community.

Required:

1. Estimate the contribution to profit of a standard 200-guest cocktail party if Dandra charges her usual price of $50 per guest.In other words, by how much would her overall profit increase?

1. How low could Dandra bid for the charity event, in terms of price per guest, and still not lose money on the event itself?Show your calculations and explain.

1. The individual who is organizing the charity's fundraising event has indicated that he has already received a bid under $45 from another catering company. Do you think Dandra should bid below her normal $50 per guest price for the charity event? Why or why not? Show your calculations and explain.