CASE - Analysis of Mixed Costs in a Pricing Decision
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:
Labor- Overhead
Month Hours 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
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 follow: Cases
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 like to win this contract because the guest list for this charity event includes many prominent individuals that she would like to land as future clients. Maria is confi dent that these potential customers would be favorably impressed by her company's services at the charity event.
Required:
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?