Note that the R 2 is approximately 096 which means that 96 of the variation in

# Note that the r 2 is approximately 096 which means

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Note that the R 2 is approximately 0.96, which means that 96% of the variation in cost is explained by labor-hours. This is a very high R 2 which indicates a very good fit. 3. Using the least-squares regression estimate of the variable overhead cost, the total variable cost per guest is computed as follows: Food and beverages ........................ \$15.00 Labor (0.5 hour @ \$10 per hour) ..... 5.00 Overhead (0.5 hour @ \$3.95 per hour) ............................................ 1.98 Total variable cost per guest ........... \$21.98 The total contribution from 180 guests paying \$31 each is computed as follows: Sales (180 guests @ \$31.00 per guest) ...... \$5,580.0 0 Variable cost (180 guests @ \$21.98 per guest) ....................................................... 3,956.40 Contribution to profit .................................. \$1,623.6 0 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 also be subtracted from revenue. 4. 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. 5. We would favor bidding slightly less than \$30 to get the
contract. Any bid above \$22 would contribute to profits and a bid at the normal price of \$31 is unlikely to land the contract. And apart from the contribution to profit, catering the event would show off the company’s capabilities to potential clients. The danger is that a price that is lower than the normal bid of \$31 might set a precedent for the future or it might initiate a price war among caterers. However, the price need not be publicized and the lower price could be justified to future clients because this is a charity event. Another possibility would be for Maria to maintain her normal price but throw in additional services at no cost to the customer. Whether to compete on price or service is a delicate issue that Maria will have to decide after getting to know the personality and preferences of the customer.

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