EXERCISE 5-12 (30 MINUTES)

7,500 labor-hours = $44,000 • The quick-and-dirty method based on the scattergraph is probably bet-ter than the high-low method in this situation and should give accept-able estimates of the fixed and variable components of overhead ex-penses. The estimates should be fairly close (within the inherent impre-cision of the method) to the estimates that would result from using least-squares regression. • Using statistical software, the least-squares regression method yields es-timates of $3.95 per labor hour for the variable cost and $48,126 per month for the fixed cost. The adjusted R

²

is 96%. The total variable cost per guest is computed as follows: Food and beverages ... $15.00 Labor (0.5 hour × $10.00 per hour) ... 5.00 Overhead (0.5 hour × $3.95 per hour) ... 1.98 Total variable cost per guest... $21.98 And the total contribution from 180 guests paying $31 each is computed as follows: Revenue (180 guests × $31.00 per guest)... $5,580.00 Variable cost (180 guests × $21.98 per guest).. 3,956.40 Contribution to profit ... $1,623.60 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.