Background of the Study

Maria Chavez owns a food business that is seasonal in nature, having peak seasons during summer months and holidays. One of its major events handled are cocktail parties, with which she has a standard cost of $26.99. The case focuses on servicing a chartable institution sponsoring a cocktail party with which prominent people are expected to attend. There is a big chance that the customers including those prominent people would be satisfied if ever we will be the one serving them.

Problem

Whether to bid lower than $30 or stay with the price of $31.

Point of View

Maria Chavez, the owner of the catering company

Objective
1.Win the bid and still not lose money. 2.Find a way to lower the cost per guest.

Alternative Courses of Action

1.Bid with the usual price of $31. 2. Bid below the price of $30.

Advantages
Alternative 1 @ 31
1. She can earn a higher profit annually.

Alternative 2 lower than $30

1. She will have a bigger chance of winning the bid. 2. Higher profit for the event. 3. Higher chance of increasing future clients.

Disadvantages
Alternative 1 @ 31
1. Lower profit from the event. 2. Lower chance of winning the bid.

Alternative 2 lower than $30

1. Shall earn lesser profit considering the fixed cost. 2. The companys good reputation is compromised.

Alternative 1
Food and beverages $15.00 Labor (0.5hrs.@$10.00/hr.) 5.00 Overhead (0.5hrs. @13.98/hr.) 6.99 Total cost per guest $26.99

Alternative 1
Sales (180 x $31.00) Cost of Sales (180 x $ 26.99) Profit $5,580.00 4,858.20 $721.80

Alternative 2
Separate the variable cost from the fixed cost of the overhead using highlow method or least square method.

High Low Method

Labor Hours High Activity Level
(August)

Overhead Expenses 77,000 55,000 22,000

7,500 2,500 5,000

Low Activity Level

(January)

Change

Variable Cost= =

Change in Cost Change in Activity 4.4/hr

Y= 4.4X + 44,000

Least Square Method

Labor Hours (X) January February March April May June July August September October November December 2,500 2,800 3,000 4,200 4,500 5,500 6,500 7,500 7,000 4,500 3,100 6,500 57,600 Overhead Expenses (Y) 55,000 59,000 60,000 64,000 67,000 71,000 74,000 77,000 75,000 68,000 62,000 73,000 805,000 XY 137,500,000 165,200,000 180,000,000 268,800,000 301,500,000 390,500,000 481,000,000 577,500,000 525,000,000 306,000,000 192,200,000 474,500,000 3,999,700,000 X 6,250,000 7,480,000 9,000,000 17,640,000 20,250,000 30,250,000 42,250,000 56,250,000 49,000,000 20,250,000 9,610,000 42,250,000 310,840,000

Least Square Method

b= n ( XY) ( X)( Y) n ( X) ( X) = 3.95/hr ( Y) b( X) n = 48,123

a=

Y = 3.95X + 48,123

Alternative 2
Food and beverages $15.00 Labor (0.5hrs.@$10.00/hr.) 5.00 Overhead (0.5hrs. @3.95/hr.) 1.975 Total cost per guest $21.975
Fixed overhead cost was disregarded since it is unlikely to be incurred in catering a cocktail party.

Alternative 2
Sales (180 x $31.00) Cost of Sales (180 x $ 21.975) Profit $5,580.00 4,858.20 $1,187.10

How low can she bid and still not lose money?
If she disregards fixed overhead cost, she can bid not lower than $22 since the cost per guest is $21.975.

How low can she bid and still not lose money?
If the fixed overhead cost are taken into account, the unit cost for the break-even point using the highest activity is: Profit= (Unit CM x Q) Fixed Expenses 0 = [(Sales-Cost) x 15,000] 48,123 Cost= $28.00

Conclusion
If the client considers the price only and assuming everything else is held at constant, we can conclude that the higher the price of the bid, the lower the chance of winning the bid. The first alternative which is staying at the same rate of $31 per guest and considering the fixed cost will yield an events profit of $721.80. In alternative 2, the assumption is there will be no fixed cost incurred since it is a cocktail event, for example rent, depreciation, insurance, and the like. With this assumption, we can now have a cost of $21.975 per guest and we could consider increasing our profit margin to 30% without having a price higher than $30. Income from this event would then increase to $1,187.10.

Recommendation
With those conclusion, we now recommend the following: 1.Decrease the cost to $21.975 by not considering the fixed overhead cost. 2.Increase contribution margin to 30%. 3.If the competitor offers a lower bid, we can decrease our price up to $22 without incurring any loss. Note: All this recommendations are on the assumption that we can satisfy prominent people in the party and with the probability that they would be our future customer effecting on bigger future inflows.

Prepared by:
Joy Galagate Maritoni Gemudiano Arjay Gonzales Jessica Aliana Habunal Chem Huervana Ayeesha Joy Igual Albert Jan Matthew Java Trichelle joy Juele Rovilyn Rose Lacupa Ray Joseph Leal