Question

Anthony Bourdain owns an international catering service that provides food and beverages at exclusive parties and business events. Bourdain’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 that Bourdain’s customers request is a cocktail party. He offers a standard cocktail party and has estimated the cost per quest for this party as follows:

Food and beverages $17.00

Labor (.50 hours @ $10.00/hour)     5.00

Overhead (.50 hours @ $18.63/hour)     9.32

Total cost per guest $31.32

Food costs vary by season. While $17 per guest is average, food costs tend to be higher during the winter months and lower during the summer months.

The standard cocktail party lasts three hours and Bourdain hires one worker for every six guests, which is one-half hour of labor per guest. These workers are hired only as needed and are paid only for the hours they actually work.

Bourdain ordinarily charges $45 per quest. He is confident about his estimates of the costs for food and beverages and labor, but is not as comfortable with the estimate of overhead costs. The $18.63 overhead cost per 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 appear below:

Food      Labor Overhead

Month Costs     Hours Expenses

January             $ 60,000 1,500 $44,000

February 67,200 1,680   47,200

March 61,200 1,800   48,000

April 86,680 2,520   51,200

May 91,800 2,700   53,600

June 92,400 3,300   56,800

July 109,200 3,900   59,200

August 126,000 4,500   61,600

September 142,800 4,200   60,000

October               91,800 2,700   54,400

November 63,240 1,860   49,600

December          156,000 3,900   58,400

   Total 34,560 $644,000

Bourdain has received a request to bid on a 120-guest fund-raising cocktail party to be given next month by the Trump re-election committee. (The party would last the usual three hours.) He would like to win this contract because the guest list includes many prominent Russian and Ukrainian leaders, as well as some undercover FBI officials that Bourdain would like to land as future clients. Bourdain is confident that these potential clients would be favorably impressed by his company’s services at the fund-raising event.

Required:

1. Using regression analysis, estimate the contribution to profit for a standard 120-guest cocktail party if Bourdain charges his usual price of $45 per guest. (In other words, how much would his overall income increase?)
2. How low could Bourdain bid for the fund-raising event, in terms of price per guest, and still not lose money on the event itself?
3. The individual who is organizing the fund-raising event has indicated that he has already received a bid under $42 from another international catering company located south of the border. Do you think Bourdain should bid below his normal $45 per guest price for the fund-raising event? Why or why not?

Answer 1