Catering Company Cost Analysis and Recession Impact
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.
- Contributions to Profit: High-Low Method Analysis: High-low method estimates variable and fixed overhead costs
- Variable Cost and Contribution Margin Calculation: Per-guest variable cost and 180-guest contribution margin
- Bidding Strategy for the Event: Optimal bid price balancing profit and competitive risk
- Air Culinaire Catering Company Overview: Air Culinaire services, pricing, and menu offerings
- Effects of the Recession on the Catering Industry: Recession-driven losses, layoffs, and operational cutbacks
- Post-Recession Recovery: Early signs of recovery through rising charter flight demand
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What makes this paper effective
- The paper moves logically from quantitative cost analysis to strategic business decision-making, grounding abstract accounting concepts in a concrete catering scenario.
- It acknowledges the limitations of the high-low method upfront, demonstrating critical awareness of the tool being applied rather than presenting it uncritically.
- The real-world Air Culinaire case study effectively contextualizes the financial concepts within industry-level economic conditions, making the analysis richer and more applicable.
Key academic technique demonstrated
The paper demonstrates applied managerial accounting: it uses the high-low method to decompose mixed costs into variable and fixed components, then applies contribution margin analysis to evaluate a specific pricing decision. This technique — moving from cost estimation to strategic recommendation — is a core skill in cost accounting and business decision-making courses.
Structure breakdown
The paper opens with a cost estimation section using the high-low method, followed by a detailed variable cost and contribution margin calculation for a 180-guest event. It then pivots to a strategic bidding discussion, weighing price floors against competitive and reputational risks. The final sections shift to an industry profile and macroeconomic analysis, examining how the 2009 recession affected a real catering firm and the early signals of recovery.
Contributions to Profit: High-Low Method Analysis
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
Variable Cost and Contribution Margin Calculation
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.
Bidding Strategy for the Event
A bid slightly below $30 would be favorable for securing the contract. Any bid above $22 would contribute to profits, and a bid at the normal price of $31 is unlikely to win the contract. Beyond the financial contribution, catering the event would showcase the company's capabilities to potential clients.
The risk is that prices lower than the normal bid of $31 might set a precedent or draw the company into a price war among caterers. However, the price need not be publicized, and the lower price could be justified to future clients on the basis that this is a charity event. Another option would be to maintain the normal price while offering additional complimentary services to the customer.
Whether to compete on price or service is a delicate issue that the company will need to resolve after gaining a better understanding of its customers' personalities and preferences (Deming, 1994).
References
Avenue Grill. (2012). Cocktail party. Retrieved September 19, 2012, from
Craig, S. (1998). How does commercial bidding work? New Mexico Business Journal.
Deming, W. E. (1994). The new economics for industry, government & education. Cambridge: MIT Center for Advanced Engineering Study.
Harrison, K. J. (2009). Catering industry hit hard by recession. Aviation International News.
Provance, W. (2009). Recession and its effect on the Las Vegas hospitality industry. Las Vegas: [University].
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