Hans Mehrlich owns a catering company that prepares banquets and parties for both individual and business functions throughout the year. Mehrlich'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.

One of the major events Mehrlich's customers request is a cocktail party. He offers a standard cocktail party and has developed the following cost structure on a per-person basis:

Food and beverages.................................€15.00

Labour (0.5 hour × €10 per hour).....................5.00

Overhead (0.5 hour × €14 per hour)..................7.00

Total costs per person...............................€27.00

Mehrlich is quite certain about his estimates of the food, beverages and labour costs but is not as comfortable with the overhead estimate. This estimate was based on the actual data for the past 12 months presented below. These data indicate that overhead expenses vary with the direct labour-hours expended. The €14 estimate was determined by dividing total overhead expended for the 12 months by total labour-hours.

Mehrlich has recently become aware of regression analysis. He estimated the following regression equation with overhead costs as the dependent variable and labour-hours as the independent variable:
y = €48 271 + €3.93X
Required
1. Plot the relationship between overhead costs and labour-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 cocktail party?
3. Hans Mehrlich has been asked to prepare a bid for a 200-person cocktail party to be given next month. Determine the minimum bid price that Mehrlich would be willing to submit to earn a positive contribution margin.

Transcribed Image Text:

Month Labour-hours Overhead costs January February March April May une July August September October November December Total 2500 2700 3000 4 200 4 500 5 500 6500 7 500 7000 4 500 3 100 6500 57 500 55 000 59 000 60000 64 000 67 000 71000 74000 77000 75000 68000 62000 73000 805000