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    Profits and Pricing on a Charity Function

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    Problem 1

    Maria Chavez owns a catering company that serves food and beverages at parties and business functions. Chavez'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 Chavez's customers request is a cocktail party. She offers a standard cocktail party and has estimated the cost per guest as follows:

    Food and beverages $15.00
    Labor (0.5 hrs. @ $10.00/hr) 5.00
    Overhead (0.5 hrs @ $13.98/hr) 6.99
    Total cost per guest $26.99

    The 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 three hours). She would really like to win this contract; the guest list for this charity event includes many prominent individuals she would like to land as future clients. Maria is confident that these potential customers would be favorably impressed by her company's services at the charity event.


    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?

    Problem 2
    Using the Adjusted Trial Balance shown below, prepare (a) an Income Statement and (b) a Statement of Retained Earnings for All Star Repairs. See attached for data.

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    Solution Summary

    The solution discusses profits and pricing on a charity function.