Case 2A-5 Analysis of Mixed Costs in a Pricing Decision [LO2-4, LO2-8]

Maria Chavez owns a catering company that serves food and beverages at parties and business functions. Chavezs 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 Chavezs customers request is a cocktail party. She offers a standard cocktail party and has estimated the cost per guest as follows:

Food and beverages	$	16.00
Labor (0.5 hour @ $9.80/hr.)		4.90
Overhead (0.5 hour @ $18.54/hr.)		9.27
Total cost per guest	$	30.17

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 14% markup to yield a price of about $32 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 $18.54 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 laborhours follow:

Month	Labor Hours	Overhead Expenses
January	2,200	$	42,000
February	2,500		46,000
March	2,700		47,000
April	3,900		51,000
May	4,200		54,000
June	5,200		58,000
July	6,200		61,000
August	7,200		64,000
September	6,700		62,000
October	4,200		55,000
November	3,800		51,000
December	6,200		59,000
Total	55,000	$	650,000

Chavez has received a request to bid on a 160-guest fund-raising 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 individuals that she would like to land as future clients. Maria is confident that these potential customers would be favorably impressed by her companys services at the charity event.

Required:

1.	Prepare a scattergraph plot that puts labor-hours on theX-axis and overhead expenses on theY-axis.

Instructions: 1. On the graph below, use the point tool (January) to plot thelabor-hours on the X -axis and overhead expenses on the Y -axis. 2. Repeat the same process for the plotter tools (February to December). 3. To enter exact coordinates, click on the point and enter the values of x and y. 4. To remove a point from the graph, click on the point and select delete option.

2(a).	Use the least-squares regression method to estimate the fixed and variable components of overhead expenses.(Round the Variable cost to 2 decimal places, and Fixed Cost to the nearest dollar.)

2(b).	Express these estimates in the formY=a+bX.(Round the Variable cost to 2 decimal places, and Fixed Cost to the nearest dollar.)

3.	Estimate the contribution to profit of a standard 160-guest cocktail party if Chavez charges her usual price of $32 per guest. (In other words, by how much would her overall profit increase?)(Round your intermediate calculations and final answer to 2 decimal places.)

4.	How low could Chavez bid for the charity event in terms of a price per guest and still not lose money on the event itself?(Round your answer to the nearest dollar.)

5.	The individual who is organizing the charitys fund-raising event has indicated that he has already received a bid under $31 from another catering company. Do you think Chavez should bid below her normal $32 per guest price for the charity event?
	Yes No