Question: Lucy Hall owns a professional character business
Lucy Hall owns a professional character business in a large metropolitan area. She hires local college students to play these characters at children’s parties and other events. Linda provides balloons, cupcakes, and punch. For a standard party the cost on a per-person basis is as follows:
Lucy is quite certain about the estimates of the materials and labor costs but is not as comfortable with the overhead estimate. The overhead estimate was based on the actual data for the past 9 months, which are presented here. These data indicate that overhead costs vary with the direct labor-hours used. The €40 estimate was determined by dividing total overhead costs for the 9 months by total labor-hours.
Lucy has recently become aware of regression analysis. She estimated the following regression equation with overhead costs as the dependent variable and labor-hours as the independent variable:
y = €43,563 + €14.66X
Required
1. Plot the relationship between overhead costs and labor-hours. Draw the regression line and evaluate it using the criteria of economic plausibility, goodness of fit, and slope of the regression line.
2. Using data from the regression analysis, what is the variable cost per person for a standard party?
3. Lucy Hall has been asked to prepare a bid for a 20-child birthday party to be given next month. Determine the minimum bid price that Lucy would be willing to submit to recoup variable costs.
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