Question
Question 1 Parties Plus is an events management company that is available for hire to organise private or corporate functions. The business is seasonal, with
Question 1
Parties Plus is an events management company that is available for hire to organise private or corporate functions. The business is seasonal, with a heavy work schedule during peak periods, meaning that extra costs are incurred. However, even in quieter periods, Parties Plus still needs to do more to better understand how they incur the costs they do.
One of the more popular functions Parties Plus offer is their Cocktail Party service. The following are currently estimated to be total costs per person for this package:
When bidding on cocktail parties, a 20% markup is always added to variable cost. Peter Portland, the owner of Parties Plus, is not so sure about the accuracy of his overhead cost estimate. The $14 per hour figure on which the overhead cost rate is based was calculated by dividing the total overhead cost ($1,207,500) by total labour hours (86,400). The following table provided the monthly data on which this calculation was based.
Cost Item | Per Person Cost | Calculation |
Food and beverages | $11.00 | $11.00 |
Labour | $18.00 | (0.9 hours @ $20 per hour) |
Overhead | $12.60 | (0.9 hours @ $14 per hour) |
Total Cost Per Person | $41.60 | $41.60 |
Month | Labour Hours | Overhead Costs |
Jan | 4,200 | $88,500 |
Feb | 3,750 | $82,500 |
Mar | 4,500 | $90,000 |
Apr | 6,750 | $100,500 |
May | 6,300 | $96,000 |
Jun | 9,750 | $111,000 |
July | 8,250 | $106,500 |
Aug | 10,500 | $112,500 |
Sep | 11,250 | $115,500 |
Oct | 6,750 | $102,000 |
Nov | 4,650 | $93,000 |
Dec | 9,750 | $109,500 |
Peter needs your assistance with better estimating Party Plus overhead costs for its Cocktail Party service.
Required (13 marks total):
- Explain what is wrong with Peters approach to estimating overhead costs for the Cocktail Party service (1 mark)
(b) Youhaverunaregressionanalysisontheavailabledataandcomeupwiththefollowingoutput.Usethe information from the analysis to calculate a revised variable cost per person for the Cocktail Party Package. (2 marks)
R Square | F | Significance F | ||
0.961010104 | 221.829034 | 1.1998E07 | ||
Coefficients | Standard Error | t Stat | Pvalue | |
Intercept | 71968.18923 | 1989.006727 | 36.1829793 | 4.65757E11 |
Labour Hours | 3.996737357 | 0.268346797 | 14.89392608 | 1.1998E07 |
(c) Explain to Peter why you are confident that your regression analysis provides a reliable estimate of Party Plus total overhead cost for their Cocktail Party offering. (3 marks)
- (d) Peter has been asked to prepare a bid for a 250person cocktail party, to be held next month. What would you recommend the minimum bid price for this cocktail party be for Party Plus to achieve their desired markup on the bid? Justify your recommendation. (2 marks)
- (e) Peter has also just heard about the HighLow method, and wants you to consider this approach to estimating overhead costs for the Party Package.
(i) Calculate and write out overhead cost function for the Cocktail Function service using the HighLow method. (3 marks).
(ii) Explain to Peter why you believe regression analysis is a superior approach to the HighLow method. (2 marks)
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