Case Study: Analysis of Mixed Costs in a Pricing Decision

Christine Dandra owns a catering company that serves food and beverages at exclusive parties and business functions. Dandra'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 that Dandra's customers request is a cocktail party. She offers a standard cocktail party and has estimated the cost per guest for this type of party as follows:

Food and beverages                               $19.00
Labour (0.5 hour @ $15.00 per hour)    $ 7.50
Overhead (0.5 hour @ $20.50 per hour) $10.25
Total cost per guest                               $36.75

The standard cocktail party lasts three hours and Dandra hires one worker for every six guests, which one half-hour of labour per guest. These workers are hired only as needed and are paid only for the hours they actually work.

Dandra ordinarily charges $50 per guest. She is confident about her estimates of the costs of food and beverages and labour but is not as comfortable with the estimate of overhead cost. The $20.50 overhead cost per labour hour was determined by dividing total overhead expenses for the past 12 months by the total labour hours for the same period. Monthly data concerning overhead costs and labour hours appear below.

Month                            Labour Hours                      Overhead Expenses
January                            1,500                                        $48,400
February                         1,560                                        $47,620
March                               1,800                                        $52,800
April                                  2,520                                        $56,320
May                                  2,700                                        $58,960
June                               3,300                                        $62,480
July                                  3,900                                        $65,120
August                            4,500                                        $67,750
September                      4,200                                        $66,000
October                            2,700                                        $59,840
November                         1,860                                        $54,560
December                         3,900                                        $64,240

Dandra has received a request to bid on a 200-guest fundraising 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. Dandra is confident that these potential customers will be favourably impressed by her company's services at the charity event.

Assignment Instructions
1. Estimate the contribution to profit of a standard 200-guest cocktail party if Dandra charges her usual price of $50 per guest. (In other words, by how much would her overall profit increase as a result of this party?). Show your calculations clearly.

2. How low could Dandra bid for the charity event, in terms of a price per guest, and still not lose money on the event itself? Again, please show your calculations clearly.

Case Study: Analysis of Mixed Costs in a Pricing Decision Christ...