aria Chavez owns a catering company that serves food andbeverages at parties and business functions. Chavez’s business isseasonal, with a heavy schedule during the summer months andholidays and a lighter schedule at other times. One of the majorevents Chavez’s customers request is a cocktail party. She offers astandard cocktail party and has estimated the cost per guest asfollows: Food and beverages
$ 18.00 Labor
(0.5 hour @ $10.00 /hr.) 5.00 Overhead
(0.5 hour @ $18.66/hr.) 9.33
Total cost per guest $ 32.33
The standard cocktail party lasts three hours and Chavez hiresone worker for every six guests, so that works out to one-half hourof labor per guest. These workers are hired only as needed and arepaid only for the hours they actually work. When bidding oncocktail parties, Chavez adds a 11% markup to yield a price ofabout $32 per guest. She is confident about her estimates of thecosts of food and beverages and labor but is not as comfortablewith the estimate of overhead cost. The $18.66 overhead cost perlabor-hour was determined by dividing total overhead expenses forthe last 12 months by total labor-hours for the same period.Monthly data concerning overhead costs and labor-hours follow:
Month Labor-Hours Overhead Expenses
January 3,300 $ 53,000
February 2,100 57,000
March 2,300 58,000
April 3,500 62,000
May 3,800 65,000
June 4,800 69,000
July 5,800 72,000
August 6,800 75,000
September 6,300 73,000
October 3,800 66,000
November 3,400 62,000
December 5,800 70,000
Total 51,700 $ 782,000
Chavez has received a request to bid on a 160-guest fundraisingcocktail party to be given next month by an important localcharity. (The party would last the usual three hours.) She wouldlike to win this contract because the guest list for this charityevent includes many prominent individuals that she would like tosecure as future clients. Maria is confident that these potentialcustomers would be favorably impressed by her company’s services atthe charity event.
2a. Use the least-squares regression method to estimate thefixed and variable components of overhead expenses.
3. If Chavez charges her usual price of $32 per guest for the160-guest cocktail party, how much contribution margin will sheearn by serving this event? (Round your intermediatecalculations and final answers to 2 decimal places.)
4. How low could Chavez bid for the charity event in terms of aprice per guest and still break even on the event itself?(Round your answer to the nearest whole dollaramount.)
2b. Express these estimates in the form Y = a + bX.
