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 $ 17.00 Labor (0.5 hour @ $10.00 /hr.) 5.00 Overhead (0.5 hour @ $18.66/hr.) 9.33 Total cost per guest $ 31.33 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 13% markup to yield a price of about $40 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 $18.66 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 3,000 $ 50,000 February 2,100 54,000 March 2,300 55,000 April 3,500 59,000 May 3,800 62,000 June 4,800 66,000 July 5,800 69,000 August 6,800 72,000 September 6,300 70,000 October 3,800 63,000 November 3,400 59,000 December 5,800 67,000 Total 51,400 $ 746,000 Chavez has received a request to bid on a 200-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. 2b. Express these estimates in the form Y = a + bX. If Chavez charges her usual price of $40 per guest for the 200-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.) How low could Chavez bid for the charity event in terms of a price per guest and still break even on the event itself? (Round your answer to the nearest whole dollar amount.)

Answer 1

	SUMMARY OUTPUT
	Regression Statistics
	Multiple R	0.935306763
	R Square	0.87479874
	Adjusted R Square	0.862278614
	Standard Error	2575.168614
	Observations	12
	ANOVA
		df	SS	MS	F	Significance F
	Regression	1	463351732.8	463351732.8	69.8714	8.00079E-06
	Residual	10	66314933.88	6631493.388
	Total	11	529666666.7
		Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
	Intercept	44,577	2231.739101	19.97415186	2.17E-09	39604.47112	49549.72032	39604.47112	49549.72032
	X Variable 1	4.11	0.49127385	8.358911463	8E-06	3.011888266	5.201140971	3.011888266	5.201140971
2a	Using the excel - Data - Data analysis - Regression function, we get Intercept as 44,577 and X variable as 4.11, i.e. Fixed cost is
	$44,577 and Variable cost per direct labor hour is $4.11
2b	Y = 44577 + 4.11X
3	Total variable cost will be computed as follows:
	Food and beverages			$17.00
	Labor (0.5 hour × $10.00 per hour)			5
	Overhead (0.5 hour × $4.11 per hour)			2.06
	Total variable cost per guest			$24.06
	And the total contribution from 200 guests paying $40 each is computed as follows:
	Sales (200 guests × $40.00 per guest)			$8,000.00
	Variable cost (200 guests × $24.06 per guest)			$ 4,812.00
	Contribution to profit			$3,188.00
Note:	Fixed cost is not included, since it is assumed that fixed cost will remain constant
4	Assuming that no additional fixed cost is incurred on this cocktail party so it will breakeven
	with variable cost charged from client, so nearly $24 bid make it breakeven.
Note: I have tried my best for correct solution, still you find any difficulty, please ask in comment, Thank You.