Chavez owns a catering company. Chavez's business is seasonal, with a heavy schedule during the summer months and holidays and a lighter one at other times. She offers a standard cocktail party and has estimated the cost per guest as follows:
Food and beverages $15.00
Labor (0.5 hrs. @ $10/hr) $5.00
Overhead (0.5 hrs @ $13.98/hr) $6.99
Total cost per guest $26.99
Standard cocktail party lasts three hours and Chavez hires one worker for every six guests, so that works out to one-half hour of labor per guest. These workers are hired only as needed and are paid only for the hours they actually work.
When bidding on cocktail parties, Chavez adds a 15% markup to yield a price of about $31 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 $13.98 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:
Month Labor hrs Overhead expenses
January 2,500 $55,000
February 2,800 59,000
March 3,000 60,000
April 4,200 64,000
may 4,500 67,000
June 5,500 71,000
July 6,500 74,000
August 7,500 77,000
September 7,000 75,000
October 4,500 68,000
November 3,100 62,000
December 6,500 73,000
Total 57,600 $805,000
Chavez has received a request to bid on a 180-guest fund-raising cocktail party to be given next month by an important local charity. (the party would last the usual 3 hours). The guest list for this charity includes many prominent individuals.
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 guest 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 guest price for the charity event? Why or why not?
(On number 3 I am thinking that she should b/c there are going to be big clients there that could offer her more business down the road. Do you agree with that. If yes/no please let me know. Thanks.)© BrainMass Inc. brainmass.com October 10, 2019, 12:47 am ad1c9bdddf
The solution explains the calculation using CVP analysis