Dana Rand owns a catering company that prepares banquets and parties for both in

Question

Dana Rand owns a catering company that prepares banquets and parties for both individual and business functions throughout the year. Rand’s business is seasonal, with a heavy schedule during the summer months and the year-end holidays and a light schedule at other times. During peak periods, there are extra costs; however, even during nonpeak periods Rand must work more to cover her expenses.

One of the major events Rand’s customers request is a cocktail party. She offers a standard cocktail party and has developed the following cost structure on a per-person basis.

When bidding on cocktail parties, Rand adds a 15 percent markup to this cost structure as a profit margin. Rand is quite certain about her estimates of the prime costs but is not as comfortable with the overhead estimate. This estimate was based on the actual data for the past 12 months presented in the following table. These data indicate that overhead expenses vary with the direct-labor hours expended. The $12 estimate was determined by dividing total overhead expended for the 12 months ($752,000) by total labor hours (61,300) and rounding to the nearest dollar.

Rand recently attended a meeting of the local chamber of commerce and heard a business consultant discuss regression analysis and its business applications. After the meeting, Rand decided to do a regression analysis of the overhead data she had collected. The following results were obtained.

Required:

Using data from the regression analysis, develop the following cost estimates per person for a cocktail party. Assume that the level of activity remains within the relevant range.

Dana Rand has been asked to prepare a bid for a 270-person cocktail party to be given next month. Determine the minimum bid price that Rand should be willing to submit.

What other factors should Dana Rand consider in developing the bid price for the cocktail party?

What are the variable costs per person?

What are the absorption(full) costs per person?

Food and beverages $ 12.00 Labor (0.7 hr. @ $10 per hour) 7.00 Overhead (0.7 hr. @ $12 per hour) 8.40 Total cost per person $ 27.40

Explanation / Answer

Part 1 :   Based on Regression Analysis, the variable cost per person for a cocktail party is calculated as follows:-   

Part 2 : Based on Regression Analysis, the absorption(full) cost per person for a cocktail party is calculated as follows:-   

Working Note: Calculation of Fixed Overhead Rate

* $54,000*12 months = $648,000

$648,000/61,300 hours = $10.57

Variable Overhead Rate = $12-$10.57 =$1.43

Part 3 : The minimum bid for a 270 person cocktail party would be $5,400. The amount is calculated by multiplying the variable cost per person of $20 by 270 persons. At any price above the variable cost, Dana Rand will be earning a contribution toward her fixed costs.

Part 4 : Other factors that Dana Rand should consider in developing a bid include the following :-

Food and Beverages $12.00 Labour(0.7 Hour@$10 per hour) $7.00 Variable Overhead (0.7 hour@$1.43) $1.00 Total $20.00

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