Carla Boyne's Catering Company Contributions to Profit

The high-low method throws away most of the data and bases the estimates of variable and fixed costs on data for only two months. For that reason, it is a decidedly inferior method in this situation (Craig, 1998). Nevertheless, if the high-low method were used, the estimates would be computed as follows:

Labor Hours Overhead Expenses ($)

Highest level of activity 7500 77000

Lowest level of activity 2500 55000

Change 5000 22000

Variable Cost = $4.40 per labor-hour

Fixed Cost Element = Total cost -- Variable cost element

= $77,000 -- ($4.40 per labor-hour x 7,500 labor-hours)

= $44,000

The total variable cost per guest is computed as follows:

Food and Beverages

$15.00

Labor (0.5-hour x $10.00 per hour)

$5.00

Overhead (0.5-hour x $3.95 per hour)

$1.98

Total Variable Cost per Guest

$21.98

And the total contribution from 180 guests paying $31 each is computed as follows:

Sales (180 guests x $31.00 per guest)

$5,580.00

Variable cost (180 guests x $21.98 per guest)

$3,956.40

Contribution to Profit

$1,623.60

Fixed costs are not included in the above computation because there is no indication that there would be any additional fixed costs incurred as a consequence of catering the cocktail party. If additional fixed costs were incurred, they should be subtracted from revenues as well to determine the profit of the party.

Therefore the Carla Boyne should present the lowest bid amount of $22 with the highest being $30 just like the other bidder. Assuming that no additional fixed costs are incurred...

Any bid above $22 would contribute to profits and a bid at the normal price of $31 is unlikely to land the contract. And apart from the contribution to profit, catering the event would show off the company's capabilities to potential clients. The danger is that prices lower than the normal bid of $31 might set a precedent for the future or it might embroil the company in a price war among caterers. However, the price need not be publicized and the lower price could be justified to future clients because this is a charity event. Another possibility would be for Boyne to maintain her normal price but throw in additional services at no cost to the customer. Whether to compete based on price or service is a delicate issue that Boyne will have to decide after getting to know the personality and preferences of her customers (Deming, 1994).
Catering Company

If you are considering a cocktail party for your function, the Air Culinaire offers a broad selection of Appetizers, Wines, Beers and Liquors for you to personalize your event. The catering company offers a wide selection of meals which matches the criterion of most catering requirements. Air Culinaire Catering Company charges $20 per person plus tax and 20% gratuity. This includes Wild mushroom risotto cakes with porcini aioli and fresh greens. The other meals provided are Beet-horseradish cured salmon, cucumber, tomato & boursin rolls among others. The above items are the company's suggestions for a cocktail party. In addition, for a cocktail event having more than 40 guests attending, the company can set up a partial or full bar set up in the room…