This paper examines a catering company's financial performance through cost analysis and strategic bidding decisions. Using the high-low method, it estimates variable and fixed overhead costs, then calculates the total variable cost per guest and the contribution to profit for a 180-guest cocktail event. The paper evaluates optimal bidding strategies, weighing price competitiveness against precedent-setting risks. It also profiles Air Culinaire as a real-world industry example, detailing how the 2009 recession reduced clientele, forced operational cutbacks, and compressed profit margins — while also noting early signs of post-recession recovery driven by rising international charter flight activity.
The high-low method discards most available data and bases estimates of variable and fixed costs on data from only two periods. For this 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 and Overhead Expenses:
Highest level of activity: 7,500 labor hours — $77,000 overhead expenses
Lowest level of activity: 2,500 labor hours — $55,000 overhead expenses
Change: 5,000 labor hours — $22,000 overhead expenses
Variable Cost = $4.40 per labor-hour
Fixed Cost Element = Total cost − Variable cost element
= $77,000 − ($4.40 per labor-hour × 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 × $10.00 per hour): $5.00
Overhead (0.5 hour × $3.95 per hour): $1.98
Total Variable Cost per Guest: $21.98
The total contribution to profit from 180 guests paying $31 each is computed as follows:
Sales (180 guests × $31.00 per guest): $5,580.00
Variable cost (180 guests × $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 any additional fixed costs would be 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 net profit of the event.
Therefore, the lowest bid amount should be approximately $22, with the highest being $30 — in line with competing bidders. Assuming that no additional fixed costs are incurred as a result of catering the charity event, any price greater than the variable cost per guest of roughly $22 would contribute to profits.
"Air Culinaire services, pricing, and menu offerings"
"Recession-driven losses, layoffs, and operational cutbacks"
"Early signs of recovery through rising charter flight demand"
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