Question

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.

3. If Chavez charges her usual price of $39 per guest for the 195-guest cocktail party, how much contribution margin will she earn by serving this event? (Round your intermediate calculations and final answers to 2 decimal places.)

Answer 1

Solution - Calculation of least price per guest which lead to break even

Calculation of Fixed cost, Variable cost and contribution

Step 1 - By using High-Low Method calculate fixed cost and variable cost per unit

Highest activity - 7000 hours and $71000 cost

Lowest Activity - 2300 hours and $53000 cost

Variable cost per Unit = Change in cost/Change in activity level

= ($71000 - $53000)/(7000 - 2300)

= $18000/4700 = $3.83 per direct labour hours

Fixed cost = Total cost - Variable cost

Fixed cost = $71000 - ($3.83*7000) = $44190

Step 2 - Total Variable cost chart

Particulars	Amount
Food and beverages	$16
Labour	$5
Overhead (0.5 hours @ $3.83 per labour hour)	$1.915
Variable cost per guest	$22.915

Step 3 - Calculation of contribution margin

Particulars	Amounr
Revenue (195 guest * $39 Per guest)	$7605
Variable cost (195 guest * $22.915)	$4468.425
Contribution margin	$3136.575

Solution 4 - lowest bid chavez can charge is more than variable cost i.e. approximate $22.92 per guest to have profits.

One assumption is made that there is no specific fixed cost involve and all othet fixed cost are absorbed