Question

answer questions 3&4 only

additional information

CASE 2A-12 Analysis of Mixed Costs in a Pricing Decision 02-11 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 Labor (0.5 hrs $10.00/hr.) Overhead (0.5 hrs. @ $13.98/hr.) Total cost per guest $15.00 5.00 6.99 $26.99 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 15% markup to yield a price of about $31 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 $13.98 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 January February March Anril Labor Hours 2.500 2.800 3,000 4.200 Overhead Expenses $ 55,000 59.000 60,000

Questions 3 & 4 ↩️

Answer 1

Q.3 : Consider relevant costs. Should fixed cost in the instance can be considered why or why not

Ans : Fixed cost are those cost which will be incurred even if there is production or not and even it would not be varying with increase or decrease of production e.g. Factory rent

We have been provided information that 48,126 is fixed cost while 3.95 per labour is variable cost.

Hence while bidding for charity event fixed cost of $48,126 are not relevant hence they are not required to be considered.

Q.4 : How low could Chavez bid for the charity event in terms of a price per guest and still breakeven on the event itself. Consider contribution margin.

Based on information it appears that Chavez will have to consider fixed overhead for pricing as she want to break even in this event itself.

Fixed cost projection = 48126+3.95*(Labor hour)

48,481.5 = 48126+3.95*(180*.5)

Breakeven Price = (Projected Fixed Cost +Total Variable Cost)/Total Unit

= (48,481.5+(20*180))/180

= $289.34 -- is the minimum cost