Question

CMA, adapted) Sara Nye owns a party- planning company that provides planning as well as food and beverages. For a standard party, the cost on a perperson basis is as follows.
Food and beverages........... $ 20.00
Labor (0.5 hour * $ 15 per hour) ...... 7.50
Overhead (0.5 hour * $ 12.50 per hour) ... 6.25
Total cost per person ........... $ 33.75

Sara is quite certain about her estimates of the food, beverage, and labor costs but is not as comfortable with the overhead estimate. The overhead estimate was based on the actual data for the past 12 months, which are presented here. These data indicate that overhead costs vary with the direct labor- hours used. The $ 12.50 estimate was determined by dividing total overhead costs for the 12 months by total labor- hours.


Sara has recently become aware of regression analysis. She estimated the following regression equation with overhead costs as the dependent variable and labor- hours as the independent variable:
y = $ 39,826 + $ 4.92X

Required
1. Plot the relationship between overhead costs and labor- hours. Draw the regression line and evaluate it using the criteria of economic plausibility, goodness of fit, and slope of the regression line.
2. Using data from the regression analysis, what is the variable cost per person for a standard party?
3. Sara Nye has been asked to prepare a bid for a 200- person standard party to be given next month. Deter-mine the minimum bid price that Sara would be willing to submit to recoup variable costs.
4. What other factors should Sara Nye consider when preparing herbid?


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  • CreatedJanuary 15, 2015
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