Analysis of Mixed Costs in a Pricing Decision

Lee owns a catering company that serves food and beverages at parties & business functions

Lee has received a request to bid on a 120-guest fundraising cocktail party for a charity event

Winning the contract is essential

How to win the contract by proposing a fair offer?

What should be the minimum bid in order to win and not lose money?

To win the contract and indirectly win the potential customers who would be favorably impressed by the company's services at the charity event.

Straight Line

Linearity explains most of the variation

Labor hours - Cost driver for overhead expenses.

More fixed overhead expense.

Least Squares Regression Equation

Fixed Cost = $38,501

Variable Cost Per hour = $5.27

Coefficient of determination R2 = 96.23%

Total variable costs per guest

Food and beverages = $15.00

Labor (0.5 hr * $10 per hr) = $ 5.00

Overhead (0.5 hr * $5.27 per hr) = $ 2.64

Total VC per guest = $ 24.64

Lowest Bid = Variable Cost per guest = $24.64

Total contribution to profit (120 guests paying $45 each):

Revenue (120 guests *$45 per guest) = $ 5400.00

Variable Costs (120 guests * 24.64 per guest) = $ 2956.80

Contribution to profit = $2443.20

Any bid above $25 would contribute to profits and a bid at normal price of $45 might not help in winning the contract.

Catering the event would show off her company's capability to potential clients. She might face the danger due to the price being lower than $45 when working with future clients. But she can always explain as this being a charity event.

She can also keep her price at $45 but provide some additional services to the customer at no cost.

...