Bob Jones owns a catering company that prepares banquets and parties for individual and corporate functions throughout the year. Jones’s business is seasonal, with a heavy schedule during the summer and on year-end holidays and a light schedule the rest of the year. Fixed operating costs are incurred evenly throughout the year.
One of Jones’s most requested functions is a cocktail party. Bob has developed the following costs per person for a standard cocktail party:
Food and beverages . . . . . . . . . . . $12.00
Direct labor . . . . . . . . . . . $ 4.00
Variable overhead . . . . . . . . . . . $ 1.50
Fixed overhead . . . . . . . . . . . $ 4.50
Required
a. Based on absorption costing, what is Jones’s cost per person? Based on variable costing, what is his cost per person?
b. Jones prices his cocktail parties by adding a 30% markup to his product costs. What price will Jones charge per person if he uses absorption costing? If he uses variable costing?
c. Jones has been asked to bid on a 150-person cocktail party to be given next month. What is the minimum price he should bid for the party? Why?
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