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 @ $9.20 /hr.)		4.60
Overhead (0.5 hour @ $18.66/hr.)		9.33
Total cost per guest	$	30.93

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 $33 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	3,400			$	54,000
February	1,800				58,000
March	2,000				59,000
April	3,200				63,000
May	3,500				66,000
June	4,500				70,000
July	5,500				73,000
August	6,500				76,000
September	6,000				74,000
October	3,500				67,000
November	3,100				63,000
December	5,500				71,000
Total	48,500			$	794,000

Chavez has received a request to bid on a 165-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.

3. If Chavez charges her usual price of $33 per guest for the 165-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.)

4. 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.)

5. The individual who is organizing the charity’s fundraising event has indicated that he has already received a bid under $32 from another catering company. Do you think Chavez should bid below her normal $33 per guest price for the charity event?

5. answer Yes or no

Answer 1