QUESTION 1 (10 Marks) Maria Chavez , Jasmine Lee owns a catering company that serves food and beverag

functions. Chavez’s business is seasonal, with a heavy schedule during the summer months and
holidays and a lighter schedule at other time. One of the major events, Chavez’s c customers request
is a cocktail party. She offers a standard cocktail party Prand has estimated the cost per guests follows:
Food and beverages DH 15
Labor (0.5 hrs @ Dh 10 per hr) 5.00
Overheads (0.5 hrs @ Dh 13.98 per hr) 6.99
Total cost per guest beverages and la DH 26.99
The standard cocktail party last three hours and Chavez hires one worker for every six guests, so that
workers out to half hour of labor per guest. These workers are hired only as needed and are paid only
for the hours they actually worked.
When bidding on cocktail parties, Chavez adds 15% markup to yield a price of about DH31 per guest.
She is confident about her estimates of the cost of the food and beverages but is not as comfortable
with the estimates of overhead costs. The DH 13.96 overhead costs per labor hours was determined by
dividing total overhead expenses to the las 12 months by total labor hours for the same period.
Monthly data concerning overhead costs and labor hours follows: Month Labor Hours Overhead Expense
January 2,500 DH55,000
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 DH 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 tree hours. She would like to win this
contract because her guest list for this charity event includes many prominent individuals that she
would like to land as future clients. Maria is confident lent event. Required:
1. Prepare a Chavez Scatter graph plot that puts the labor-hours on the x-axis and the overhead
expenditure on the Y-axis. What insights are reveals by your scatter graph?

Labor Hours Overhead Expense

1,500 11,500
1,680 12,500
1,800 13,000
2,520 16,000
2,700 18,000
3,300 18,000
 3,900 24,000
4,500 26,500
4,200 25,000
2,700 17,500
1,860 14,000
3,900 24,500
34,560 220,500

Overhead Expense
30,000

25,000

20,000
Overhead Ex
15,000

10,000

5,000

0
1,500 1,680 1,800 2,520 2,700 3,300 3,900 4,500 4,200 2,700 1,860 3,900

This following scattergraph interesting points about the behavior of overhead costs has been revealed by
1 The relation between overhead expense and labor hours is shown by a straight line. However the overhea
expenses show a downward trend due to increase in labor hours .This is mainly due to the fact of increas
2 The data points are all very close to the straight line. This indicates that most of the variation in overhead
is due to the fact of labor hours. Therefore,there is no use of using other cost driver.
3 Overhead expenses are mainly consist of fixed expenses such as as rent, depreciation, and salary

2. Use the least squares regression method to estimate the fixed and variable components of the
overhead expenses. Express theses estimates in the form Y = a + bX.

Month (n) Labor Hours (x)

Jan 1,500
Feb 1,680
Mar 1,800
Apr 2,520
May 2,700
Jun 3,300
Jul 3,900
 Aug 4,500
Sep 4,200
Oct 2,700
Nov 1,860
Dec 3,900
Total 34,560

n= 12.00
Σx = 34,560.00
Σy = 220,500.00
Σx Square = 111,902,400.00
Σxy = 696,660,000.00

Per hour Overhead Cost as per Least Squares (nΣxy-Σx,Σy) /

Regression = nΣx square - (Σx)`square

Per hour Overhead Cost as per Least Squares 739,440,000.00

Regression = 148,435,200.00

Per labor hour for the variable cost 4.98

Total Cost 11,500

Less Variable Cost -7472
4,028

COV(X,Y) 5135000
VARP(X) 1030800
slope b 4.98
Intercept b 4,028

Y = 4,028 + 4.98 X

3. Estimate the contribution to profit of a standard 120 guest graduation party of Lee charges
her usual price of 39 per guest. (In other words, by how much would her overall profit increase?)

Food and beverages 17

Labor (0.5 *$10.00 ) 5
Overhead (0.5 *$6.38) 2.49
Total variable cost per guest 24.49

Sales (120* $39.00) 4680

 Less Variable cost (120 *$24.49) -2938.80
Contribution to profit 1741.20

4. How low could Lee bill for the charity event in terms of price per guest and still not lose
money on the event itself?

The lowest can be the variable cost per guest and still not lose money. The lowest bid could be $2

5. The individual who is organizing the client’s fund-raising event has indicated that he has
already received a bid under 35 from another catering company. Do you think lee
should bid below her normal 39 per guest price for the charity event? Why?

Since the organizer has already received a bid for under $35, bidding at $39 will not get the order.
The variable cost is $24.49 per guest and so there is scope to bid at a price less than $35. Doing this part
to more orders for Lee. ThereforeLee has to decide the price between $24.49 and $35 which will get the o
We would favor bidding slightly less than $35to get the contract.

Food and beverages 17

Labor (0.5 *$10.00 ) 5
Overhead (0.5 *$3.95) 2.49
Total variable cost per guest 24.49
Add Markup 3.67
Price Bid Per Guest 28.16
any that serves food and beverages at parties and business
summer months and
vez’s c customers request
the cost per guests follows:

or every six guests, so that

needed and are paid only

of about DH31 per guest.

but is not as comfortable
or hours was determined by
or the same period.
bor Hours Overhead Expense

arty to be given next month

would like to win this
ent individuals that she

is and the overhead

 Overhead Expense

00 1,860 3,900

rhead costs has been revealed by the Scatter graph:

straight line. However the overhead
s mainly due to the fact of increasing returns to scale
most of the variation in overhead expenses
r cost driver.
nt, depreciation, and salary

le components of the

Overhead xy x`2
expenses (y)
11,500 17250000 2250000
12,500 21000000 2822400
13,000 23400000 3240000
16,000 40320000 6350400
18,000 48600000 7290000
18,000 59400000 10890000
24,000 93600000 15210000
 26,500 119250000 20250000
25,000 105000000 17640000
17,500 47250000 7290000
14,000 26040000 3459600
24,500 95550000 15210000
220,500 696,660,000 111,902,400

COVAR(C86:C97,D86:D97)
VARP(C86:C97)
C120/C121
AVERAGE(D86:D97)-C122*AVERAGE(C86:C97)

rty of Lee charges

erall profit increase?)
 d still not lose

oney. The lowest bid could be $24.49

ated that he has

t $39 will not get the order.

price less than $35. Doing this party may also lead
$24.49 and $35 which will get the order