Costs Separation and Decision Making

Restaurant Sedap Gila is a catering company that serves food and beverages at parties and business functions. Sedap Gila's business is seasonal, with a heavy scheduling during the summer months and holidays and a lighter schedule at other times.

One of the major events Sedap Gila's customer request is a cocktail party. She offers a standard cocktail party has estimated the cost per guest as follows:

Food and beverages

RM16.00

Labour (0.5 hour @ RM9.80/hour)

RM4.90

Overheard (0.5hour @ RM18.54/hour)

RM9.27

Total cost per guest

RM30.17

The standard cocktail party lasts three hours and Sedap Gila hires one worker for every six guests, so that works out to one and a half-hour of labour per guest. These workers are hired only as needed and are paid only for the hours they actually work.

When bidding on cocktail parties, Sedap Gila adds a 14% mark-up to yield a price of about RM32.00 per guest. She is confident about the estimates of the costs of food and beverages and labour but is not as comfortable with the estimate of overhead cost. The RM18,54 overhead cost per labour hour was determines by providing total overhead expenses for the last 12 months by total labour-hour for the same period.

Monthly data concerning overhead costs and labour hours is as below:

Month

Labour Hours

Overhead Expenses

January

2,200

RM42,000

February

2,500

RM46,000

March

2,700

RM47,000

April

3,900

RM51,000

May

4,200

RM54,000

June

5,200

RM58,000

July

6,200

RM61,000

August

7,200

RM64,000

September

6,700

RM62,000

October

4,200

RM55,000

November

3,800

RM51,000

December

6,200

RM59,000

Total

55,000

RM650,000

The main problem:

Sedap Gila 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). The restaurant 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. Sedap Gila is confident that these potential customers would be favourably impressed by her company's services at the charity event