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)
The total variable cost per guest is computed as follows:
Food and Beverages
Labor (0.5-hour x $10.00 per hour)
Overhead (0.5-hour x $3.95 per hour)
Total Variable Cost per Guest
And the total contribution from 180 guests paying $31 each is computed as follows:
Sales (180 guests x $31.00 per guest)
Variable cost (180 guests x $21.98 per guest)
Contribution to Profit
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 as a result of catering the charity event, any price greater than the variable cost per guest of roughly $22 would contribute to profits.
Bidding Low or High for the Event
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 prices lower than the normal bid of $31 might set a precedent for the future or it might embroil the company in 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 Boyne to maintain her normal price but throw in additional services at no cost to the customer. Whether to compete based on price or service is a delicate issue that Boyne will have to decide after getting to know the personality and preferences of her customers (Deming, 1994).
If you are considering a cocktail party for your function, the Air Culinaire offers a broad selection of Appetizers, Wines, Beers and Liquors for you to personalize your event. The catering company offers a wide selection of meals which matches the criterion of most catering requirements. Air Culinaire Catering Company charges $20 per person plus tax and 20% gratuity. This includes Wild mushroom risotto cakes with porcini aioli and fresh greens. The other meals provided are Beet-horseradish cured salmon, cucumber, tomato & boursin rolls among others. The above items are the company’s suggestions for a cocktail party. In addition, for a cocktail event having more than 40 guests attending, the company can set up a partial or full bar set up in the room for easier and efficient service to the guests. The price charged by Avenue Grill fall within the specifications of a simple cocktail party (Avenue Grill, 2012).
Effects of Recession to the Company
The catering industry has been hard hit by the recession. The recession witnessed in 2009 has led to the closure of most caterers including Sky Gourmet, which serves most of the northern California airports. With the onset of the recession and the collapse of the housing market, local industries started to suffer. With the city’s main reliance on the hospitality industry paying off so well in the past, economic diversity was never a major concern.
Air Culinaire, a catering firm with 14 kitchens across the United States was hit hard with the onset of the recession during the year 2009. This has led to increased transportation prices for the company’s staff, reduced clientele, and low profit margins. By January 2009, the number of staff-client services had dropped by 70% compared to the year 2008.
To avoid layoffs, the firm has reduced its workforce through attrition, replacing workers who leave only when absolutely necessary. In addition, the owners; who are also chefs have returned to the kitchen to avoid incurring extra operating expenses. And as a firm that took pride in providing 24/7 service, the caterer has elected to reduce hours of operation. Air Culinaire has not closed any of its 14 kitchens, but has made some changes in hours and instead of keeping a full staff on call 24/7; they have assigned some to an on-call status (Provance, 2009).
The recession has caused the caterer to use fewer servers during functions. This was the case two weeks ago when the firm sent approximately 20 clients in a 250-attendee event as opposed to the usual 50 client per 250-attendee during cocktail events. This clearly shows the impact the recession has brought about to the catering industry.
The other effect the recession has brought about is lowering of prices. Most clients are asking for quotes, especially for more extravagant items such as wines, champagnes as well as caviar among other times. This has made the company lower its prices to comply with the customers’ requirements; a factor that has led to reduced sales and diminishing profit margins for the caterer company.
The recovery of the firm following the recession has not been easy, but in the past few months business appears to be improving slowly (Harrison, 2009 ). With the gradual increase in flight activity reported by companies such as Aviation Research Group, Air Culinaire is optimistic that sales are likely to improve and reduce the burdens felt during the recession period. The clients requiring the services of the catering company are seen to be increasing; an indication that the post-recession period is nearer for the company. With increasing number of clients mostly being international charter flights, business activities and sales have been up about five to seven percent among the caterer’s kitchens.
Avenue Grill . (2012). Cocktail Party. Retrieved September 19, 2012, from www.avenuegrill.com: http://www.avenuegrill.com/pparty_cparty.html
Craig, S. (1998). How does Commercial Bidding Work? New Mexico Business Journal.
Deming, W.E. (1994). The New Economics for Industry, Government & Education. Cambridge: MIT Center for Advanced Engineering Study.
Harrison, K.J. (2009 ). Catering Industry Hit Hard by Recession. Aviation International News .
Provance, W. (2009). Recession and its Effect on the Las Vegas Hospitality Industry. Las Vegas: University of Nevada.
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