nicole_1986
Aug 27, 2010, 07:36 AM
In order to estimate the contribution to profit of the charity event, it is first necessary to estimate the variable costs of catering the event. The costs of food, beverages, and labor are all apparently variable with respect to the number of guests. However, the situation with respect to overhead expenses is less clear. A good first step is to plot the labor hour and overhead expense data in a scattergraph as shown below.
Case 5-18 (continued)
This scattergraph reveals several interesting points about the behavior of overhead costs:
•
•
•
The overhead expenses could be decomposed into fixed and variable elements using the high-low method, least-squares regression method, or even the quick-and-dirty method based on the scattergraph.
•
Labor Overhead
Hours Expense
High level of activity
Low level of activity
Change
Variable cost =
=
Case 5-18 (continued)
Fixed cost element = Total cost – Variable cost element
=
=
• In this situation, the quick-and-dirty method based on the scattergraph is probably better than the high-low method and should give acceptable estimates of the fixed and variable components of overhead expenses. The estimates should be fairly close (within the inherent imprecision of the method) to the estimates that would result from using least-squares regression.
• Using statistical software, the least-squares regression method yields estimates of ______per labor hour for the variable cost and $____________ per month for the fixed cost.
The total variable cost per guest is computed as follows:
Food and beverages
Labor ( )
Overhead ( )
Total variable cost per guest
And the total contribution from 180 guests paying $31 each is computed as follows:
Sales ( 180 guests × $ per guest)
Variable cost (180 guests × $ per guest)
Contribution to profit
Fixed costs are not included in the above computation because there is no indication that there would be any additional fixed costs incurred as a consequence of catering the cocktail party. If additional fixed costs were incurred, they should be subtracted from revenues as well to determine the profit of the party.
2. Assuming that no additional fixed costs are incurred as a result of catering the charity event, any price greater than the variable cost per guest of roughly $_____ would contribute to profits.
Case 5-18 (continued)
3. We would favor bidding slightly less than $_____ to get the contract. Any bid above $_____ would contribute to profits and a bid at the normal price of $______ is unlikely to land the contract. And apart from the contribution to profit, catering the event would show off the company’s capabilities to potential clients. The danger is that a price lower than the normal bid of $____ might set a precedent for the future or it might embroil the company in a price war among caterers. However, the price need not be publicized and the lower price could be justified to future clients because this is a charity event. Another possibility would be for Maria to maintain her normal price but throw in additional services at no cost to the customer. Whether to compete based on price or service is a delicate issue that Maria will have to decide after getting to know the personality and preferences of her customers.
1. Estimate the contribution to profit of a standard 180 guest cocktail party if Chavez charges her usual price of $31 per guest. ( In other words by how much would her overall profit increase?
2. How low could Chavez bid for the charity event in terms of a price per quest and still not lose money on the event itself?
3. The individual who is organizing the charity's fund-raising event has indicated that he has already received a bid under $30 from another catering company. Do you think Chavez should bid below her normal $31 per quest price for the charity event? Why or why not?
Case 5-18 (continued)
This scattergraph reveals several interesting points about the behavior of overhead costs:
•
•
•
The overhead expenses could be decomposed into fixed and variable elements using the high-low method, least-squares regression method, or even the quick-and-dirty method based on the scattergraph.
•
Labor Overhead
Hours Expense
High level of activity
Low level of activity
Change
Variable cost =
=
Case 5-18 (continued)
Fixed cost element = Total cost – Variable cost element
=
=
• In this situation, the quick-and-dirty method based on the scattergraph is probably better than the high-low method and should give acceptable estimates of the fixed and variable components of overhead expenses. The estimates should be fairly close (within the inherent imprecision of the method) to the estimates that would result from using least-squares regression.
• Using statistical software, the least-squares regression method yields estimates of ______per labor hour for the variable cost and $____________ per month for the fixed cost.
The total variable cost per guest is computed as follows:
Food and beverages
Labor ( )
Overhead ( )
Total variable cost per guest
And the total contribution from 180 guests paying $31 each is computed as follows:
Sales ( 180 guests × $ per guest)
Variable cost (180 guests × $ per guest)
Contribution to profit
Fixed costs are not included in the above computation because there is no indication that there would be any additional fixed costs incurred as a consequence of catering the cocktail party. If additional fixed costs were incurred, they should be subtracted from revenues as well to determine the profit of the party.
2. Assuming that no additional fixed costs are incurred as a result of catering the charity event, any price greater than the variable cost per guest of roughly $_____ would contribute to profits.
Case 5-18 (continued)
3. We would favor bidding slightly less than $_____ to get the contract. Any bid above $_____ would contribute to profits and a bid at the normal price of $______ is unlikely to land the contract. And apart from the contribution to profit, catering the event would show off the company’s capabilities to potential clients. The danger is that a price lower than the normal bid of $____ might set a precedent for the future or it might embroil the company in a price war among caterers. However, the price need not be publicized and the lower price could be justified to future clients because this is a charity event. Another possibility would be for Maria to maintain her normal price but throw in additional services at no cost to the customer. Whether to compete based on price or service is a delicate issue that Maria will have to decide after getting to know the personality and preferences of her customers.
1. Estimate the contribution to profit of a standard 180 guest cocktail party if Chavez charges her usual price of $31 per guest. ( In other words by how much would her overall profit increase?
2. How low could Chavez bid for the charity event in terms of a price per quest and still not lose money on the event itself?
3. The individual who is organizing the charity's fund-raising event has indicated that he has already received a bid under $30 from another catering company. Do you think Chavez should bid below her normal $31 per quest price for the charity event? Why or why not?