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 @ $11.00 /hr.)		5.50
Overhead (0.5 hour @ $18.66/hr.)		9.33
Total cost per guest	$	31.83

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 14% markup to yield a price of about $36 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	2,600			$	46,000
February	2,000				50,000
March	2,200				51,000
April	3,400				55,000
May	3,700				58,000
June	4,700				62,000
July	5,700				65,000
August	6,700				68,000
September	6,200				66,000
October	3,700				59,000
November	3,300				55,000
December	5,700				63,000
Total	49,900			$	698,000

Chavez has received a request to bid on a 180-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 $36 per guest for the 180-guest cocktail party, how much contribution margin will she earn by serving this event?

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?

Answer 1

2)
a)
SUMMARY OUTPUT
Regression Statistics
Multiple R	0.95092348
R Square	0.90425546
Adjusted R Square	0.894681
Standard Error	2251.94789
Observations	12
ANOVA
	df	SS	MS	F	Significance F
Regression	1	478953974	478953974	94.4445946	2.0642E-06
Residual	10	50712693	5071269.3
Total	11	529666667
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	41068.5101	1875.64369	21.8956886	8.8393E-10	36889.3155	45247.7046	36889.3155	45247.7046
X Variable 1	4.11178114	0.42309845	9.71826088	2.0642E-06	3.16905904	5.05450325	3.16905904	5.05450325
b)
Y = $41068.51 + 4.11 x labour hours
c)
Food and beverages	$17.00
Labor (0.5 hour @ $11.00 /hr.)	$5.50
Overhead (0.5 hour @ $4.11/hr.)	$         2.06
Total Variable cost per guest	$24.56
Sales = $36 x 180 guest	$  6,480.00
Less: variable cost = $24.56 x 180 guest	$  4,420.06
Contribution Margin	$  2,059.94
d)
We would favor bidding slightly less than $35 to get the contract. Any bid above $25 would contribute to profits and a bid at the normal price of $36 is unlikely to land the contract