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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.
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
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.
Required:
- 1. Explain the difference between the overhead rate originally estimated by Dana Rand and the overhead rate developed from the regression method.
- 2. Using data from the regression analysis, develop the following cost estimates per person for a cocktail party.
- a. Variable cost per person
- b. 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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Chapter 6 Solutions
Managerial Accounting: Creating Value in a Dynamic Business Environment
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Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT