Analysis of Mixed Costs in a Pricing Decision

This case is in Chapter 2A (Appendix). Please read the case (see attachment or the textbook) and answer the following questions (one post). These questions are modified from the textbook case. Only these questions should be answered. Your response can be concise but must be specific Learning Objectives: 1. Analyze profitability using a contribution margin approach. 2. Apply strategies to estimate mixed costs. Case 2A-12 Requirements (these are different from the textbook) Prepare a rough scattergraph plot on note paper that puts labor-hours on the X-axis and overhead expenses on the Y-axis. This is for your review only. Do Not Include in Your Post. 1. What insights and trends are revealed by your scattergraph in this case? Be specific. Additional Information for the questions below: Maria is not comfortable with the estimate of overhead cost. Information is provided in the case for labor hours and overhead expenses. The least-squares regression method can be used to estimate the fixed and variable components of overhead expenses. You do not have to compute this. The cost formula, in the form Y = a + bx, using labor-hours as the activity base is $48,126 per month plus $3.95 per labor-hour, or: Y = $48,126 + $3.95X. Use those results in answering questions below: 2. If Chavez charges her usual price of $31 per guest for the 180-guest cocktail party, how much contribution margin will she earn by serving this event? Use the least-squares result above. 3. Consider relevant costs. Should fixed costs in this instance be considered? Why or why not? 4. How low could Chavez bid for the charity event in terms of a price per guest and still break even on the event itself? Consider the contribution margin. 5. The individual who is organizing the charity's fundraising event has indicated that he has already received a bid just under $30 from another catering company. Do you think Chavez should bid below her normal $31 per guest price for the charity event? Why or why not? 6. If a lower price is considered what would be one advantage and one disadvantage of such a decision? CASE 2A-12 Analysis of Mixed Costs in a Pricing Decision L02-11 Maria Chavez owns a catering company that serves food and beverages at parties and business functions. Chavez's business is One of the major events Chavez's customers request is a cocktail party. She offers a standard cocktail party and has estimated the cost per guest as follows: $15.00 5.00 Food and beverages Labor (0.5 hrs @ $10,00/hr.) Overhead (0.5 hrs. @ $13.98/hr.) Total cost per guest 6.99 $26.99 The standard cocktail party lasts three hours and Chavez hires one worker for every six guests, so that works out to one-half hour of labor per guest. These workers are hired only as needed and are paid only for the hours they actually work. When bidding on cocktail parties, Chavez adds a 15% markup to yield a price of about $31 per guest. She is confident about her estimates of the costs of food and beverages and labor but is not as comfortable with the estimate of overhead cost. The $13.98 overhead cost per labor hour was determined by dividing total overhead expenses for the last 12 months by total labor hours for the same period. Monthly data concerning overhead costs and labor hours follow: Month January February Labor Hlours 2.500 2.800 3,000 Overhead Expenses $ 55.000 59.000 March 60,000 Anril 16.000 The standard cocktail party lasts three hours and Chavez hires one worker for every six guests, so that works out to one-half hour of labor per guest. These workers are hired only as needed and are paid only for the hours they actually work. When bidding on cocktail parties, Chavez adds a 15% markup to yield a price of about $31 per guest. She is confident about her estimates of hour was determined by dividing total overhead expenses for the last 12 months by total laborhours for the same period. Monthly data concerning overhead costs and labor hours follow: Maath January February March April May June July August September October November December Total Labor-Hours 2.500 2,800 3.000 4.200 4,500 5.500 6,500 7.500 7.000 4.500 3.100 6,500 57.600 Overhead Expenses $ 55,000 59.000 60,000 64.000 67.000 71.000 74,000 77.000 75,000 68.000 62.000 73.000 $805,000 Chavez has received a request to bid on a 150 guest fundraising cocktail party to be given next month by an important local charity. The art de to th om she would like to win this montrenthe October November December Total 4.500 3.100 6,500 57,600 68,000 62.000 73,000 $805.000 Chavez has received a request to bid on a 180-guest fundraising cocktail party to be given next month by an important local Page 128 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 individuals that she would like to secure as future clients. Maria is confident that these potential customers would be favorably impressed by her company's services at the charity event. Required: 1. Prepare a scattergraph plot that puts labor hours on the X-axis and overhead expenses on the Yaxis. What insights are revealed by your scattergraph? 2. Use the least squares regression method to estimate the fixed and variable components of overhead expenses. Express these estimates in the form Ya+bX 3. If Chavez charges her usual price of $31 per guest for the 180-guest cocktail party, how much contribution margin will she earn by serving this event? 4. How low could Chavez bid for the charity event in terms of a price per guest and still break even on the event itself? 5. The individual who is organizing the charity's fundraising event has indicated that he has already received a bid under $30 from another catering company. Do you think Chavez should bid below her normal $31 per guest price for the charity event? Why or why not? (CMA, adapted) This case is in Chapter 2A (Appendix). Please read the case (see attachment or the textbook) and answer the following questions (one post). These questions are modified from the textbook case. Only these questions should be answered. Your response can be concise but must be specific Learning Objectives: 1. Analyze profitability using a contribution margin approach. 2. Apply strategies to estimate mixed costs. Case 2A-12 Requirements (these are different from the textbook) Prepare a rough scattergraph plot on note paper that puts labor-hours on the X-axis and overhead expenses on the Y-axis. This is for your review only. Do Not Include in Your Post. 1. What insights and trends are revealed by your scattergraph in this case? Be specific. Additional Information for the questions below: Maria is not comfortable with the estimate of overhead cost. Information is provided in the case for labor hours and overhead expenses. The least-squares regression method can be used to estimate the fixed and variable components of overhead expenses. You do not have to compute this. The cost formula, in the form Y = a + bx, using labor-hours as the activity base is $48,126 per month plus $3.95 per labor-hour, or: Y = $48,126 + $3.95X. Use those results in answering questions below: 2. If Chavez charges her usual price of $31 per guest for the 180-guest cocktail party, how much contribution margin will she earn by serving this event? Use the least-squares result above. 3. Consider relevant costs. Should fixed costs in this instance be considered? Why or why not? 4. How low could Chavez bid for the charity event in terms of a price per guest and still break even on the event itself? Consider the contribution margin. 5. The individual who is organizing the charity's fundraising event has indicated that he has already received a bid just under $30 from another catering company. Do you think Chavez should bid below her normal $31 per guest price for the charity event? Why or why not? 6. If a lower price is considered what would be one advantage and one disadvantage of such a decision? CASE 2A-12 Analysis of Mixed Costs in a Pricing Decision L02-11 Maria Chavez owns a catering company that serves food and beverages at parties and business functions. Chavez's business is One of the major events Chavez's customers request is a cocktail party. She offers a standard cocktail party and has estimated the cost per guest as follows: $15.00 5.00 Food and beverages Labor (0.5 hrs @ $10,00/hr.) Overhead (0.5 hrs. @ $13.98/hr.) Total cost per guest 6.99 $26.99 The standard cocktail party lasts three hours and Chavez hires one worker for every six guests, so that works out to one-half hour of labor per guest. These workers are hired only as needed and are paid only for the hours they actually work. When bidding on cocktail parties, Chavez adds a 15% markup to yield a price of about $31 per guest. She is confident about her estimates of the costs of food and beverages and labor but is not as comfortable with the estimate of overhead cost. The $13.98 overhead cost per labor hour was determined by dividing total overhead expenses for the last 12 months by total labor hours for the same period. Monthly data concerning overhead costs and labor hours follow: Month January February Labor Hlours 2.500 2.800 3,000 Overhead Expenses $ 55.000 59.000 March 60,000 Anril 16.000 The standard cocktail party lasts three hours and Chavez hires one worker for every six guests, so that works out to one-half hour of labor per guest. These workers are hired only as needed and are paid only for the hours they actually work. When bidding on cocktail parties, Chavez adds a 15% markup to yield a price of about $31 per guest. She is confident about her estimates of hour was determined by dividing total overhead expenses for the last 12 months by total laborhours for the same period. Monthly data concerning overhead costs and labor hours follow: Maath January February March April May June July August September October November December Total Labor-Hours 2.500 2,800 3.000 4.200 4,500 5.500 6,500 7.500 7.000 4.500 3.100 6,500 57.600 Overhead Expenses $ 55,000 59.000 60,000 64.000 67.000 71.000 74,000 77.000 75,000 68.000 62.000 73.000 $805,000 Chavez has received a request to bid on a 150 guest fundraising cocktail party to be given next month by an important local charity. The art de to th om she would like to win this montrenthe October November December Total 4.500 3.100 6,500 57,600 68,000 62.000 73,000 $805.000 Chavez has received a request to bid on a 180-guest fundraising cocktail party to be given next month by an important local Page 128 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 individuals that she would like to secure as future clients. Maria is confident that these potential customers would be favorably impressed by her company's services at the charity event. Required: 1. Prepare a scattergraph plot that puts labor hours on the X-axis and overhead expenses on the Yaxis. What insights are revealed by your scattergraph? 2. Use the least squares regression method to estimate the fixed and variable components of overhead expenses. Express these estimates in the form Ya+bX 3. If Chavez charges her usual price of $31 per guest for the 180-guest cocktail party, how much contribution margin will she earn by serving this event? 4. How low could Chavez bid for the charity event in terms of a price per guest and still break even on the event itself? 5. The individual who is organizing the charity's fundraising event has indicated that he has already received a bid under $30 from another catering company. Do you think Chavez should bid below her normal $31 per guest price for the charity event? Why or why not? (CMA, adapted)