Managerial Accounting for decision making Case study 1

Costs separation and decision making

Restaurant Sedap Gila is a catering company that serves food and beverages at parties and business functions. Sedapgila'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 Sedapgila's 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 Sedapgila 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, Sedapgila 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:

MonthLabor HoursOverhead Expenses

$

January2,20042,000

February2,50046,000

March2,70047,000

April3,90051,000

May4,20054,000

June5,20058,000

July6,20061,000

August7,20064,000

September6,70062,000

October4,20055,000

November3,80051,000

December6,20059,000

Total55,000$ 650,000

Sedapgila 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. Sedapgila is confident that these potential customers would be favorably impressed by her company's services at the charity event.

You are required to read the case carefully and answer the following questions :

a. Seperate the fixed and variable costs from the mixed costs presented in the case.

b. Calculate the Break even point of the company.

c. Calculate the Safety margin of the company

d. Calculate the Degree of Operating Leverage of the company

e. Comment about the performance and the potential of the company.