[Chapter 3] (10 marks) Analysis of Mixed Costs in a Pricing Decision Michael Li owns a catering company that serves food and beverages at exclusive parties and business functions. Li'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 Li's customers request is a cocktail party. He offers a standard cocktail party and has estimated the cost per guest for this type of party as follows: Food and beverage. Labour (0.5 hour at $15.00 per hour). Overhead (0.5 hour at $20.50 per hour).. Total cost per guest...... $19.00 .7.50 10.25 ..$36.75 This standard cocktail party lasts three hours, and Li 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. Li ordinarily charges $50 per guest. He 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: Overhead Labour Month Hours Costs January 1,500 $48,050 February.. 1,560 48,500 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 Li has received a request to bid on a 300-guest fundraising cocktail party to be given next month by an important local charity. The party would last the usual three hours. He would like to win this contract because the guest list for this charity event includes many prominent and influential individuals from the local community. 1 Required: 1. Estimate the contribution to profit of a standard 300-guest cocktail party if Li charges her usual price of $50 per guest. In other words, by how much would her overall profit increase? 2. How low could Li 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. 3. 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 LISD= should bid below her normal $50 per guest price for the charity event? Why or why not? Show your calculations and explain