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 Labor (0.8 hr. $11 per hour) Overhead (0.8 hr. $13 per hour) Total cost per person $13.00 8.80 10.40 $32.20 When bidding on cocktail parties, Rand adds a 20 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 xpended. The $13 estimate was determined by dividing total overhead expended for the 12 months ($825,000) by total labor hours (61,300) and rounding to the nearest dollar. Month January February March April May June July August September October November December Labor Hours 5,800 6.900 3,600 6,700 3,100 2,900 5,500 4,600 2,500 5,600 7,800 6,300 61,300 Overhead Expenses $ 87,000 58,000 82,000 64,000 60,000 76,000 82,000 45,000 41,000 78,000 86,000 66,000 $ 825,000 Total 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. 52,000 Intercept (a) Coefficient (b) 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. 3. Dana Rand has been asked to prepare a bid for a 280-person cocktail party to be given next month. Determine the minimum bid price that Rand should be willing to submit. 4. What other factors should Dana Rand consider in developing the bid price for the cocktail party? Complete this question by entering your answers in the tabs below. Required 2 Required 3 Required 4 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. (Round intermediate calculations and final answers to 2 decimal places.) a. Variable cost per person Absorption (full) cost per person b. 0.00

Answer 1

2)
a.Variable cost per person
Food and beverages	$                     13.00
Labor (.8 hr. @ $11 per hour)	$                       8.80
Variable Overhead (.8 hr. @ $ 3 per hour)	$                       2.40
Total cost per person	$                     24.20
b)
Food and beverages	$                     13.00
Labor (.8 hr. @ $11 per hour)	$                       8.80
Variable Overhead (.8 hr. @ $ 3 per hour)	$                       2.40
Fixed overhead (.8 hr. @ $10.18/hr.)*	$                       8.14
Total cost per person	$                     32.34
Fixed overhead cost per unit = (52000 x 12)/61300 hours	$                     10.18
3)
Minimum Bid Price = 280 x $24.20 (variable cost per unit)	$                6,776.00
The   minimum   bid   for   a   280-person   cocktail   party  would   be $6776 .    At any price above the variable cost, Dana will be earning a contribution toward his fixed costs.
4)
Other factors that Dana Rand should consider in developing a bid include the following:
1)The realization that regression analysis is based on historical data, and that any anticipated changes in the cost structureshould be considered.
2) The assessment of the current capacity of Dana’s business. If the business is at capacity, other work would have to be sacrificed at some opportunity cost.
3) A determination of whether or not Dana’s bid will set a precedent for lower prices.
4) Analyses of  the competition.   If competition is rigorous, Dana may  not have much bargaining power