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Maria Chavez owns a catering company that serves food and beverages at parties and business functions. Chavez's

business is seasonal, with a heavy schedule 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:

 

   Food and beverages$17.00Labor (0.5 hour @ $9.80

/hr.)

 4.90Overhead (0.5 hour @ $18.58/hr.) 9.29Total cost per guest$31.19

 

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 13% markup to yield a price of about $35 per guest. She is confident about her estimates of the costs of food and beverages and labor but is not as comfortable with the estimate of overhead cost. The $18.58 overhead cost per labor-hour was determined by dividing 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:

 

MonthLabor-Hours Overhead

ExpensesJanuary2,500  $45,000 February2,500   49,000 March2,700   50,000 April3,900   54,000 May4,200   57,000 June5,200   61,000 July6,200   64,000 August7,200   67,000 September6,700   65,000 October4,200   58,000 November3,800   54,000 December6,200   62,000 Total55,300  $686,000 

 

Chavez has received a request to bid on a 175-guest fundraising cocktail party to be given next month by an important local charity. (The party would last the usual three hours.) She would like to win this contract because the guest list for this charity event includes many prominent individuals that she would like to secure as future clients. Maria is confident that these potential customers would be favorably impressed by her company's services at the charity event.

3. If Chavez charges her usual price of $35 per guest for the 175-guest cocktail party, how much contribution margin will she earn by serving this event? (Round your intermediate calculations and final answers to 2 decimal places.)

Top Answer

The contribution margin is determined by multiplying the total guest (175) and the usual... View the full answer

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