Dana Rand owns a catering company that prepares banquets and parties for both in
ID: 2572013 • Letter: D
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.
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 $12 estimate was determined by dividing total overhead expended for the 12 months ($752,000) by total labor hours (61,300) and rounding to the nearest dollar.
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.
Required:
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.
Dana Rand has been asked to prepare a bid for a 270-person cocktail party to be given next month. Determine the minimum bid price that Rand should be willing to submit.
What other factors should Dana Rand consider in developing the bid price for the cocktail party?
Food and beverages $ 12.00 Labor (0.7 hr. @ $10 per hour) 7.00 Overhead (0.7 hr. @ $12 per hour) 8.40 Total cost per person $ 27.40Explanation / Answer
The regression equation is: y = a+bx
Here y = overhead expenses and x = labor hours
The result of regression is: a = 54,000 and b = 2. Thus y = 54,000+2x or overhead expenses = 54,000+2*(labor hours)
This means that 54,000 is a fixed cost and 2*labor hours is a variable cost.
Thus cost per person = cost of food and beverages+labor+overhead (as computed through regression analysis). Now overhead cost per person = 0.7 hours per person*$2 per labor hour (as given in the regression equation) = $1.4 per person.
Cost per person = 12+7+1.4 = $20.4. Total for 270 people = $20.4*270 = $5,508
Thus Dana Rand should quote below 5508 as she will incur loss. This is the minimum amount (on cost basis). If profits are included then minimum bid amount = cost+profit = 5,508*(1+15%) = $6,334.20
Other factors that should be considered are oppotunity costs of not taking other projects as a reult of bidding for this party.
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