Home / Questions / Analysis of Mixed Costs in a Pricing Decision Jasmine Lee owns a catering company that ser...
Analysis of Mixed Costs in a Pricing Decision
Jasmine Lee owns a catering company that serves food and beverages at exclusive parties and busi- ness functions. Lee’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 that Lee’s customers request is a cocktail party. She offers a standard cocktail party and has estimated the cost per guest for this party as follows:
Food and beverages . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$17.00 |
Labor (0.5 hour @ $10.00 per hour) . . . . . . . . . . . . . . . |
5.00 |
Overhead (0.5 hour @ $18.63 per hour) . . . . . . . . . . . . |
9.32 |
Total cost per guest . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
$31.32 |
This standard cocktail party lasts three hours and Lee hires one worker for every six guests, which is one-half hour of labor per guest. These workers are hired only as needed and are paid only for the hours they actually work.
Lee ordinarily charges $45 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 $18.63
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 appear below:
January . . . . . . . . . . . . . . . . |
1,500 |
|
$ 44,000 |
February . . . . . . . . . . . . . . . |
1,680 |
|
47,200 |
March . . . . . . . . . . . . . . . . . |
1,800 |
|
48,000 |
April . . . . . . . . . . . . . . . . . . . |
2,520 |
|
51,200 |
May . . . . . . . . . . . . . . . . . . . |
2,700 |
|
53,600 |
June . . . . . . . . . . . . . . . . . . |
3,300 |
|
56,800 |
July . . . . . . . . . . . . . . . . . . |
3,900 |
|
59,200 |
August . . . . . . . . . . . . . . . . . |
4,500 |
|
61,600 |
September . . . . . . . . . . . . . |
4,200 |
|
60,000 |
October . . . . . . . . . . . . . . . . |
2,700 |
|
54,400 |
November . . . . . . . . . . . . . . |
1,860 |
|
49,600 |
December . . . . . . . . . . . . . . |
3,900 |
|
58,400 |
Total . . . . . . . . . . . . . . . . . . |
34,560 |
|
$644,000 |
Lee has received a request to bid on a 120-guest fund-raising 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 land as future clients. Lee is confident that these potential customers would be favorably impressed by her company’s services at the charity event.
Required:
1. Prepare a scattergraph plot that puts labor-hours on the X-axis and overhead expenses on the
Y-axis. What insights are revealed by your scattergraph?
2. Use the least-squares regression method to estimate the fixed and variable components of over- head expenses.
3. Estimate the contribution to profit of a standard 120-guest cocktail party if Lee charges her usual price of $45 per guest. (In other words, by how much would her overall profit increase?)
4. How low could Lee bid for the charity event, in terms of a price per guest, and still not lose money on the event itself?
5. The individual who is organizing the charity’s fund-raising event has indicated that he has already received a bid under $42 from another catering company. Do you think Lee should bid below her normal $45 per guest price for the charity event? Why or why not?
Jun 28 2020 View more View Less
What were the major forces behind urban growth in early United States history? What influence did urban growth have on urban concentration and population density? What ne...
Aug 09 2020The ozone layer ________.a. is getting thickerb. helps keep Earth warmc. is a layer in the deep oceand. screens out UV radiation
Jul 04 20211) ____________________ is a unique market structure providing output at the lowest cost over the long run. a.Oligopoly b.Monopolistic Competition c.Monopoly d.Pure competition
Jun 03 2020Al BA IMBrovement, depreclated over 27 1/2 years. As an improvement, depreciated over 31 1/2 years. OMark for follow up Question 42 of 75. Every year, a college basketbal...
Aug 29 2020Automated Teller Machines (ATM) are designed so that users will provide a personal identification number (PIN) and a card to access their bank accounts. Give examples of ...
Jul 16 2020What is the description of the bonding in C2H2 (exists as HCCH) using the localized electron model?
Jun 18 2021_____________ structures have effort put into placing all the jobs needed to produce and sell a product within the same group of employees. (A) Customer-based (B) Pro...
Mar 26 2018Solve: x3y" x 24"-2xy +6y= x2
Apr 29 2021Producing a quantity larger than the equilibrium of supply and demand is inefficient because the marginal buyer's willingness to pay isFirst, you try! Thoughts on what th...
Jul 12 2021An autoclave sterilizes equipment used in medical settings and research laboratories by subjecting items to high-pressure steam at 121.0°C. How much heat (in kJ) is requi...
Aug 21 2021