Question

Randolph Dana owns a catering company that prepares banquets and parties for business functions throughout the year. Dana’s business is seasonal, with a heavy schedule during the summer months and the year-end holidays. During peak periods there are extra costs; however, even during nonpeak periods Dana must work more to cover his expenses.
One of the major events Dana’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.................................................................. $14.00
Labor (.6 hr. @ $11 per hour).................................................... 6.60
Overhead (.6 hr. @ $14 per hour).............................................. 8.40
Total cost per person.................................................................. $29.00
When bidding on cocktail parties, Dana adds a 15 percent markup to this cost structure as a profit margin. Dana is quite certain about his 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 expended. The $14 per hour overhead estimate was determined by dividing total overhead expended for the 12 months ($805,000) by total labor hours (57,600) and rounding to the nearest dollar.


Dana 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, Dana decided to do a regression analysis of the overhead data he had collected. The following results were obtained.
Intercept (a)....................................................................... 48,000
Coefficient (b).................................................................... 4

Required:
1. Explain the difference between the overhead rate originally estimated by Dana and the overhead rate developed from the regression method.
2. Using data from the regression analysis, develop the following cost estimates per person for a cocktail party.
a. Variable cost per person
b. Absorption (full) cost per person (includes both variable and fixed cost per person)
Assume that the level of activity remains within the relevant range.
3. Dana has been asked to prepare a bid for a 250-person cocktail party to be given next month. Determine the minimum bid price that Dana should be willing to submit.
4. What other factors should Dana consider in developing the bid price for the cocktail party?
(CMAadapted)


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  • CreatedApril 22, 2014
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