Required information Case 5A12 Analysis of Mixed Costs in a

Required information Case 5A-12 Analysis of Mixed Costs in a Pricing Decision [LO5-11) The following information applies to the questions displayed below Maria Chave business is seasonal, with a heavy ?chedule 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 z owns a catering company that serves food and beverages at parties and business functions Chavez\'s Food and beverages Labor (8.5 hour $18.0 /hr.) Overhead (8.5 hour $18.68/hr.) Total cost per guest $16.08 5.08 9.34 $30.34 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 12% markup to yield a price of about S39 per guest. She is content about her estimates of the costs of food and beverages and labor but is not as comfortable with the estimate of overhead cost. The S18.68 overhead cost per labor-hour was determined by dlviding 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 Labor- Overhead Prev 567 of7? Next > 8

Solution

We will use high low method to split the overhead cost into fixed and variable cost Variable cost per labor hour = (y2-y1)/(x2-x1) where, y2 = Total overhead cost at highest level y1 = Total overhead cost at lowest level x2 = number of labor hours at highest level x1 = number of labor hours at lowest level Variable cost = (71000-53000)/(7000-2300)                             = 18000/4700                             = $3.83 Service charges (195 x $39) $7,605 Less: Food and beverages (195 x $16) $3,120 Labor (195 x $5) $975 Variable overheads (195 x 0.5hour x $3.83) $373 Total Variable cost $4,468 Total Contribution margin $3,137