Dana Rand owns a catering company that prepares banquets and parties for both individual and business functions throughout the year. Rand’s business is seasonal, with a heavy schedule during the summer months  and  the  year-end  holidays  and  a  light  schedule  at  other  times.  During  peak  periods,  there  are  extra costs; however, even during nonpeak periods Rand must work more to cover her expenses. One of the major events Rand’s customers request is a cocktail party. She offers a standard cocktail party and has developed the following cost structure on a per-person basis. Food and beverages $15 Labor (.5hr.@ $10 per hour) 5 Overhead (.5hr. @ $14 per hour) 7 Total cost per person $27                                                            When bidding on cocktail parties, Rand adds a 15 percent markup to this cost structure as a profit margin. Rand is quite certain about her 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 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. Month Labor Hours Overhead Expenses January 2,500 55,000 February 2,800 59,000 March 3,000 60,000 April 4,200 64,000 Mayo 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 "Rand 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, Rand decided to do  a  regression  analysis  of  the  overhead  data  she  had  collected.  The  following  results  were  obtained. Intercept (a) .......................................................................................48,000 Coefficient (b) ....................................................................................4 Required: Explain the difference between the overhead rate originally estimated by Dana Rand and the over-head rate developed from the regression method. 2.Using data from the regression analysis, develop the following cost estimates per person for a cocktail party. Variable cost per person Absorption cost per person Assume that the level of activity remains within the relevant range. 3.Dana Rand has been asked to prepare a bid for a 200-person cocktail party to be given next month. Determine the minimum bid price that Rand should be willing to submit.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Dana Rand owns a catering company that prepares banquets and parties for both individual and business functions throughout the year. Rand’s business is seasonal, with a heavy schedule during the summer months  and  the  year-end  holidays  and  a  light  schedule  at  other  times.  During  peak  periods,  there  are  extra costs; however, even during nonpeak periods Rand must work more to cover her expenses. One of the major events Rand’s customers request is a cocktail party. She offers a standard cocktail party and has developed the following cost structure on a per-person basis.

Food and beverages

$15

Labor (.5hr.@ $10 per hour)

5

Overhead (.5hr. @ $14 per hour)

7

Total cost per person

$27

                                                          

When bidding on cocktail parties, Rand adds a 15 percent markup to this cost structure as a profit margin. Rand is quite certain about her 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 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.

Month

Labor Hours

Overhead Expenses

January

2,500

55,000

February

2,800

59,000

March

3,000

60,000

April

4,200

64,000

Mayo

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

"Rand 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, Rand decided to do  a  regression  analysis  of  the  overhead  data  she  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 Rand and the over-head rate developed from the regression method.

2.Using data from the regression analysis, develop the following cost estimates per person for a cocktail party.

  1. Variable cost per person
  2. Absorption cost per person

Assume that the level of activity remains within the relevant range.

3.Dana Rand has been asked to prepare a bid for a 200-person cocktail party to be given next month. Determine the minimum bid price that Rand should be willing to submit.

4.What other factors should Dana Rand consider in developing the bid price for the cocktail party?"

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