Dana Rand owns a catering company that prepares banquets andparties for both individual and business functions throughout theyear. Rand’s business is seasonal, with a heavy schedule during thesummer months and the year-end holidays and a light schedule atother times. During peak periods, there are extra costs; however,even during nonpeak periods Rand must work more to cover herexpenses.
One of the major events Rand’s customers request is a cocktailparty. She offers a standard cocktail party and has developed thefollowing cost structure on a per-person basis.
| | | |
| Food and beverages | $ | 13.00 | |
| Labor (0.4 hr. @ $11 per hour) | | 4.40 | |
| Overhead (0.4 hr. @ $13 per hour) | | 5.20 | |
| Total cost per person | $ | 22.60 | |
|
When bidding on cocktail parties, Rand adds a 15 percent markup tothis cost structure as a profit margin. Rand is quite certain abouther estimates of the prime costs but is not as comfortable with theoverhead estimate. This estimate was based on the actual data forthe past 12 months presented in the following table. These dataindicate that overhead expenses vary with the direct-labor hoursexpended. The $13 estimate was determined by dividing totaloverhead expended for the 12 months ($782,000) by total labor hours(58,500) and rounding to the nearest dollar.
| Month | Labor
Hours | Overhead
Expenses |
| January | | 7,400 | | $ | 86,000 | |
| February | | 5,200 | | | 87,000 | |
| March | | 4,100 | | | 47,000 | |
| April | | 4,900 | | | 60,000 | |
| May | | 2,600 | | | 76,000 | |
| June | | 7,100 | | | 46,000 | |
| July | | 4,600 | | | 40,000 | |
| August | | 3,800 | | | 67,000 | |
| September | | 2,300 | | | 51,000 | |
| October | | 5,300 | | | 52,000 | |
| November | | 3,700 | | | 86,000 | |
| December | | 7,500 | | | 84,000 | |
| Total | | 58,500 | | $ | 782,000 | |
|
Rand recently attended a meeting of the local chamber ofcommerce and heard a business consultant discuss regressionanalysis and its business applications. After the meeting, Randdecided to do a regression analysis of the overhead data she hadcollected. The following results were obtained.
| |
| Intercept (a) | 55,000 |
| Coefficient (b) | 2 |
|
Required:
Using data from the regression analysis, develop the followingcost estimates per person for a cocktail party. Assume that thelevel of activity remains within the relevant range. a. variablecost per person? b. absorption (full) cost per person?
Dana Rand has been asked to prepare a bid for a 240-personcocktail party to be given next month. Determine the minimum bidprice that Rand should be willing to submit. Minimum Bid Price?
What other factors should Dana Rand consider in developing thebid price for the cocktail party?
The chart below shows the correct answers for 4. in order.
|
| | The assessment of the current capacityof her business. If the business is at capacity, other work wouldhave to be sacrificed at some opportunity cost. | | Analyses of the competition. Ifcompetition is rigorous, she may not have much bargainingpower. | | A determination of whether or not herbid will set a precedent for lower prices. | | The realization thatregression analysis is based on historical data, and that anyanticipated changes in the cost structure should beconsidered. |
|
