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...
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