maria chavez owns a catering company that serves food and beverages at parties and b 492207

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:

Food and beverages 15.00

Labor (0.5 hrs. @ $10.00/hr.) 5.00

Overhead (0.5 hrs. @ $13.98/hr.) 6.99

Total cost per guest $26.99

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 $31per 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: