Question

In: Accounting

Maria Chavez owns a catering company that serves food and beverages at parties and business functions....

Maria Chavez owns a catering company that serves food and beverages at parties and business functions. Chavez’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 Chavez’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 @ $10.00

/hr.)

5.00
Overhead (0.5 hour @ $18.68/hr.) 9.34
Total cost per guest $ 30.34

The standard cocktail party lasts three hours and Chavez 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, Chavez adds a 12% markup to yield a price of about $39 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 $18.68 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 labor-hours follow:

Month Labor-Hours Overhead
Expenses
January 2,900 $ 49,000
February 2,300 53,000
March 2,500 54,000
April 3,700 58,000
May 4,000 61,000
June 5,000 65,000
July 6,000 68,000
August 7,000 71,000
September 6,500 69,000
October 4,000 62,000
November 3,600 58,000
December 6,000 66,000
Total 53,500 $ 734,000

Chavez has received a request to bid on a 195-guest fundraising cocktail party to be given next month by an important local charity. (The party would last the usual three hours.) She would like to win this contract because the guest list for this charity event includes many prominent individuals that she would like to secure as future clients. Maria is confident that these potential customers would be favorably impressed by her company’s services at the charity event.

2a. Use the least-squares regression method to estimate the fixed and variable components of overhead expenses. (Round the Variable cost to 2 decimal places and Fixed Cost to the nearest whole dollar amount.)

2b. Express these estimates in the form Y = a + bX. (Round the Variable cost to 2 decimal places and Fixed Cost to the nearest whole dollar amount.)

Solutions

Expert Solution

2.a.
Unit variable cost = b = (12*3388900000-53500*734000) / (12*266850000 - (53500)^2)
= (40666800000 - 39269000000) / (3202200000 - 2862250000)
= 1397800000 / 339950000
= $4.11
Total fixed costs = a    = (734000 - 4.11*53500) / 12
= 514115 / 12
= $42,843
Month Labor Overhead
Hours Expenses
x y x^2 x*y
January 2900 49000 8410000 142100000
February 2300 53000 5290000 121900000
March 2500 54000 6250000 135000000
April 3700 58000 13690000 214600000
May 4000 61000 16000000 244000000
June 5000 65000 25000000 325000000
July 6000 68000 36000000 408000000
August 7000 71000 49000000 497000000
September 6500 69000 42250000 448500000
October 4000 62000 16000000 248000000

November

3600 58000 12960000 208800000
December 6000 66000 36000000 396000000
53500 734000 266850000 3388900000
Σx Σy Σx2 Σxy
Formulas
Unit Variable Cost=b=(nΣxy-Σx.Σy) / ((nΣx^2-(Σx)^2)
Total Fixed Cost=a=(Σy-bΣx) / n
     Where,
n is number of pairs of units—total-cost used in the calculation;
Σy is the sum of total costs of all data pairs;
Σx is the sum of units of all data pairs;
Σxy is the sum of the products of cost and units of all data pairs; and
Σx2 is the sum of squares of units of all data pairs.
2.b.
The linear regression model is represented by  
Total cost Y = 42,843 + 4.11 x
Where x is the number of labor hours.

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