Question

Dana Rand owns a catering company that prepares banquets and parties for both individual and business functions throughout the year. Rand’s business is seasonal, with a heavy schedule during the summer months and the year-end holidays and a light schedule at other times. During peak periods, there are extra costs; however, even during nonpeak periods Rand must work more to cover her expenses.

One of the major events Rand’s customers request is a cocktail party. She offers a standard cocktail party and has developed the following cost structure on a per-person basis.

Food and beverages	$	13.00
Labor (0.4 hr. @ $11 per hour)		4.40
Overhead (0.4 hr. @ $13 per hour)		5.20
Total cost per person	$	22.60

When bidding on cocktail parties, Rand adds a 15 percent markup to this cost structure as a profit margin. Rand is quite certain about her estimates of the prime costs but is not as comfortable with the overhead estimate. This estimate was based on the actual data for the past 12 months presented in the following table. These data indicate that overhead expenses vary with the direct-labor hours expended. The $13 estimate was determined by dividing total overhead expended for the 12 months ($782,000) by total labor hours (58,500) and rounding to the nearest dollar.

Month	Labor Hours			Overhead Expenses
January		7,400		$	86,000
February		5,200			87,000
March		4,100			47,000
April		4,900			60,000
May		2,600			76,000
June		7,100			46,000
July		4,600			40,000
August		3,800			67,000
September		2,300			51,000
October		5,300			52,000
November		3,700			86,000
December		7,500			84,000
Total		58,500		$	782,000

Rand recently attended a meeting of the local chamber of commerce and heard a business consultant discuss regression analysis and its business applications. After the meeting, Rand decided to do a regression analysis of the overhead data she had collected. The following results were obtained.

Intercept (a)	55,000
Coefficient (b)	2

Required:

2. Using data from the regression analysis, develop the following cost estimates per person for a cocktail party. Assume that the level of activity remains within the relevant range. a. variable cost per person? b. absorption (full) cost per person?

3. Dana Rand has been asked to prepare a bid for a 240-person cocktail party to be given next month. Determine the minimum bid price that Rand should be willing to submit. Minimum Bid Price?

4. What other factors should Dana Rand consider in developing the bid price for the cocktail party?

The chart below shows the correct answers for 4. in order.

The assessment of the current capacity of her business. If the business is at capacity, other work would have to be sacrificed at some opportunity cost. Analyses of the competition. If competition is rigorous, she may not have much bargaining power. A determination of whether or not her bid will set a precedent for lower prices. The realization that regression analysis is based on historical data, and that any anticipated changes in the cost structure should be considered.

Answer 1