TUGAS CASE 2

MM5004 – Finance Report and Control

Semester 1-2022/2023 BLEMBA67 Hybrid Weekend

Lecturer : Asep Darmansyah

Created By :
PANDIT PURNAJUARA
NIM : 29122187

BLEMBA67 HYBRID WEEKEND

SCHOOL OF BUSINESS AND MANAGEMENT
BANDUNG INSTITUT OF TECHNOLOGY
2022
CASE 2 : Chavez’s Business
A. Known :
 Maria Chavez owns a catering company that serves food and beverages at parties and
business functions
 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. . . . . . . . . . . . . . . . $ 15.00
Labor (0.5 hrs. @ $10.00/hr.) . . . . . . . . . 5.00
Overhead (0.5 hrs. @ $13.98/hr.). . . . . . . . . 6.99
Total cost per guest . . . . . . . . . . . . . . . . . . . . $ 26.99

 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.
 When bidding on cocktail parties, Chavez adds a 15% markup to yield a price of about
$31 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.
 Monthly data concerning overhead costs and labor-hours follow:
Month Labor- Hours Overhead Expenses
January . . . . . . . . . . 2,500 $ 55,000
February . . . . . . . . . 2,800 59,000
March. . . . . . . . . . . . 3,000 60,000
April . . . . . . . . . . . . . 4,200 64,000
May . . . . . . . . . . . . . 4,500 67,000
June. . . . . . . . . . . . . 5,500 71,000
July . . . . . . . . . . . . . 6,500 74,000
August . . . . . . . . . . . 7,500 77,000
September. . . . . . . . 7,000 75,000
October . . . . . . . . . . 4,500 68,000
November . . . . . . . . 3,100 62,000
December . . . . . . . . 6,500 73,000
Total. . . . . . . . . . . . . 57,600 $805,000

 Chavez has received a request to bid on a 180-guest fund-raising cocktail party to be

given next month by an important local charity.
 She would like to win this contract because the guest list for this charity event includes
many prominent individuals that she would like to land as future clients.
B. Question and Answer :

1. Estimate the contribution to profit of a standard 180-guest cocktail party if

Chavez charges her usual price of $ 31 per guest. (In other words, by how much
would her overall profit increase ?)
Answer :
Data :
 Price = $ 31 per guest
 Cost = $ 26.99 per guest
31−26.99
 Profit Margin= ( 26.99 ) x 100% = 14.85 %
Or Total Profit = (31 – 26.99) x 180 = $ 721.80

2. How low could Chavez bid for the charity event in terms of a price per guest and
still not lose money on the event itself ?
3. The individual who is organizing the charity’s fund-raising event has indicated
that he has already received a bid under $ 30 from another catering company. Do
you think Chavez should bid below her normal $ 31 per guest price for the charity
event ? Why or why not?
Answer Number 2 and 3:
To answer the questions we can analyse the cost component factor and margin that she set
itself. The components that make up the bid consist of :
a. Food and Beverages (Direct Material)
b. Labor (Direct Labor)
c. Overhead
d. Margin
From the three cost component above and margin factor, we can identify that if Chavez
want to make the bid lower, she can choose to decrease or optimize the cost from that three
cost component or minimize the margin.
The analysis and assumption :
1. Chavez is confident about her estimates of the costs of food and beverages so that to
optimize the cost from this option we don't think it will happen considering the price of
food needs is also something that is certain to get the information from the market.
2. From the information above, the labor (one worker) can handle six guest in the last
three hours. (Productivity : 3 labor.hour / 6 guests = 0.5). If Chavez can motivate the
worker to work harder and handle more guest in three hours (assumption : increase the
productivity to handle 8 guests in 3 hour) so that, she can maximize the cost and can
lower the bid without change the margin. From the assumption, let say the productivity
become : 3 labor.hour / 8 guests = 0.375).
 The rate of Labor = $10.00/hr
 The new target productivity = 0.375
 Total Cost of Labor = 10 x 0.375 = $ 3.75
3. She can choose to optimize the overhead cost too for the option to lowering the bid.
She can choose the rate of overhead cost per labor hour by looking at the data in the
 last 12 months that are given. The calculation and data for overhead per labor hour in
the last 12 months as follows :

Overhead Cost per

Month Labor- Hours Overhead Expenses
Labor Hour
(1) (2) (3) (4) = (3) / (2)
January . . .
2.500 55.000 22,00
.......
February . .
2.800 59.000 21,07
.......
March. . . . .
3.000 60.000 20,00
.......
April . . . . .
4.200 64.000 15,24
........
May . . . . . .
4.500 67.000 14,89
.......
June. . . . . .
5.500 71.000 12,91
.......
July . . . . . .
6.500 74.000 11,38
.......
August . . . .
7.500 77.000 10,27
.......
September. .
7.000 75.000 10,71
......
October . . .
4.500 68.000 15,11
.......
November .
3.100 62.000 20,00
.......
December .
6.500 73.000 11,23
.......
Total. . . . . .
57.600 805.000 13,98
.......

From the calculation or table above we can identify that the lowest overhead cost per
labor hour that has been occurred is on August : $10,27. So she can choose this data to
calculate for the lowest overhead cost become : 0,5 hrs x $ 10,27 = $ 5,13.

4. Apart from adjusting the cost, she can also reduce the amount of the margin.
Considering for the question number 3 it is known that there are bidders from other
catering company who set a price of $ 30, so Chavez can open the option to reduce the
margin to a minimum so that the bidding results are a little less than $ 30. After we
calculate it can be found that the margin can be set from 15% to 11% which results in
a bid value of 29.96 dollars (a little less than $ 30).
The recapitulation of the analysis, assumptions, and calculations is as shown in the
following table.
 Option 1 (Increase Service Capacity per
No Data Given Option 2 (Minimizing Overhead Cost) Option 3 (Lowering Margin)
Labor)

1 Food and beverages 15,00 Fixed 15,00 Fixed 15,00 Fixed 15,00

Labor (0.5 hrs. @ =0,375 hrs x

2
$10.00/hr.) 5,00 3,75 Fixed 5,00 Fixed 5,00
$10
Overhead (0.5 hrs. @ = 0,5 hrs x $
3
$13.98/hr.) 6,99 Fixed 6,99 5,13 Fixed 6,99
10,27
4 Total cost per guest 26,99 Sum 1-3 25,74 Sum 1-3 25,13 Sum 1-3 26,99

Total Cost Plus

5 Margin (Opsi Harga 31,04 Total x 1,15 29,60 Total x 1,15 28,90 Total x 1,11 29,96
Bid)

HIGH (direct impact to service quality to

MEDIUM (potential unexpected costs are
6 RISK customer, potential loss for future LOW (no impact to service quality)
not covered)
opportunity to gain order)

Conclusion :
From the analysis and calculation above we can answer the question number 2 that Chavez
can choose the option number 2 (Minimizing the Overhead Cost) based on the information
data from overhead cost per labor hour in 12 months. So that, she can get to lowering the
bid become $28.90.
For the question number 3, the answer is Chavez should bid below her normal $31 per
guest and defeat the bid of other competitor (in $30 per guest), because she can make the
charity event as a place to show the quality of her company’s business services, as part of
a marketing and promotion strategy to get various kinds of orders again in the future.
Especially considering that at this charity event the guest list includes many prominent
individuals that she would like to land as future clients. So that thing became a strong
reason for Chavez to fight to win the tender.
She can choose the option number 3 by lowering the margin into 11% so she can get the
bid in $ 29,96 per guest. For the option number 1 (Increase the service capacity per labor
become 8 guests per labor) is something that has a high risk in term of service. Especially
considering that at this charity event the guest list includes many prominent individuals, It
will be a big gamble if it requires workers to serve guests more than usual capacity
suddenly and at this special event. It is feared that there will be a lack of service from the
workers to the guests at this important event. In option number 2, namely by minimizing
overhead costs, although not as high as the first option from a risk point of view, this option
can result in risk in the form of unexpected costs on overhead that cannot be covered in
the future. So by considering these risks, Option number 3 can be chosen which is
relatively risk-free by only reducing the margin value slightly in the hope that the tender
can be won to attract more clients in the future.

4. Identify types of overhead cost which be possible incurred in the chavez's business,
and why was the direct labor hours as activity base (cost driver) to determine
overhead cost ?
Answer :
In a catering business like this, overhead costs that can arise are in the form of
supporting utilities, office or vehicle rental, food delivery logistics, communication
costs, decoration costs and brochures.
Direct labor hours as activity base (cost driver) to determine overhead cost because
direct labor hours is a major item or a major component in direct costs that can
significantly affect the overall cost. And as we know that the catering business line is
kind of services that provide products in the form of cooking until serving the food to
the customers. So all service activities carried out by labor will always be supported to
support its business services in the form of overhead costs. The time spent by labor in
performing its services will be directly proportional to the cost incurred significantly
considering that labor is a major item or main component in the direct cost of the
catering business type.