Question
In: Accounting
Sabrri Spa offers a variety of skin treatments and spa services, including massages, facials, body treatments,...
Sabrri Spa offers a variety of skin treatments and spa services, including massages, facials, body treatments, and manicures. The spa is owned by the largest dermatology practice in town, and the doctors invested $450,000 to start the spa five years ago. The spa is in its own building next to the clinic, and it has its own staff and management, so almost all of the spa’s costs are direct costs.
The average one-hour treatment is priced at $100. Sabrri has the following cost structure:
|
Variable Cost per Treatment |
Fixed Cost per Month |
||
|
Therapist |
$40 |
||
|
Supplies |
4 |
||
|
Management |
$5,500 |
||
|
Laundry |
X |
||
|
Utilities |
1,400 |
||
|
Rent |
7 |
6,000 |
|
|
Repairs/cleaning |
6 |
1,500 |
|
|
Total |
$57 |
$Y |
Assume that all treatments have the same variable cost structure depicted in the table.
Please complete the following parts
- The costs in the table above are all direct costs associated with the spa, except laundry. The spa and clinic use shared laundry services. The total monthly budget for laundry services is $300. The cost driver is laundry loads, and the laundry services budget is based on 75 loads of laundry for the spa and clinic combined. The spa’s budget should be based on their anticipated use of 50 loads of laundry per month. Determine the amount of laundry cost per month that the spa should budget, and put the number in for “X” in the table above. Then, add up the fixed cost column and put in a number for “Y” in the table above.
- Calculate the number of treatments Sabrri must perform each month in order to break even.
- In April, the therapists are expected to perform 550 treatments. Prepare a budget for April assuming 550 treatments are given.
- Assume some time has passed, and actual results for April are available. The spa actually performed 530 treatments and incurred the following actual costs. Prepare a variance analysis for April comparing actual performance to the simple budget based on 550 treatments that you created in Part C.
|
Actual Operating Results for April |
|||
|
Revenue |
$53,000 |
||
|
Therapists |
$21,280 |
||
|
Supplies |
1,795 |
||
|
Management |
5,125 |
||
|
Laundry |
220 |
||
|
Utilities |
1,505 |
||
|
Rent |
9,710 |
||
|
Repairs/cleaning |
5,080 |
||
|
Total Expenses |
$44,715 |
||
|
Actual Profit |
8,285 |
||
- Explain and interpret the simple variance analysis results that you just determined.
- Prepare a variance analysis for April comparing actual performance to a flexible budget based on the actual number of treatments performed in April of 530 treatments.
- Explain and interpret the flexible variance analysis results that you just calculated.
- Do the break-even calculation you performed in Part B and the budgeted and actual profits computed in Parts C, D, and F accurately capture the true economics of Sabrri, especially from the perspective of the doctors who invested in the spa? Explain why or why not.
Solutions
Expert Solution
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| Sabrri Spa | |
| Answer A | Amount $ |
| Monthly laundry cost | 300.00 |
| Number of laundry | 75.00 |
| Cost per laundry | 4.00 |
| Number of laundry in Spa | 50.00 |
| Cost of laundry in Spa | 200.00 |
| Fixed Cost | |
| Management | 5,500.00 |
| Laundry | 200.00 |
| Utilities | 1,400.00 |
| Rent | 6,000.00 |
| Repairs/cleaning | 1,500.00 |
| Total Fixed Cost | 14,600.00 |
| Answer B | Amount $ |
| Average treatment fee | 100.00 |
| Less: Variable cost per treatment | |
| Therapist | 40.00 |
| Supplies | 4.00 |
| Rent | 7.00 |
| Repairs/cleaning | 6.00 |
| Total Variable cost per treatment | 57.00 |
| Contribution per treatment | 43.00 |
| Total Fixed Cost | 14,600.00 |
| Break even no. of treatments | 339.53 |
| Answer C | Per unit | Variable amount | Fixed Cost | Total | Remarks |
| No. of treatments | 550.00 | ||||
| Average treatment fee | 100.00 | 55,000.00 | 55,000.00 | It is calculated as $ 100* 550 treatments. | |
| Therapist | 40.00 | 22,000.00 | 22,000.00 | It is calculated as $ 40* 550 treatments. | |
| Supplies | 4.00 | 2,200.00 | 2,200.00 | It is calculated as $ 4* 550 treatments. | |
| Management | 5,500.00 | 5,500.00 | It is a fixed cost and does not change with number of treatments. | ||
| Laundry | 200.00 | 200.00 | It is a fixed cost and does not change with number of treatments. | ||
| Utilities | 1,400.00 | 1,400.00 | It is a fixed cost and does not change with number of treatments. | ||
| Rent | 7.00 | 3,850.00 | 6,000.00 | 9,850.00 | It is calculated as $ 7* 550 treatments + fixed cost of $ 6,000. |
| Repairs/cleaning | 6.00 | 3,300.00 | 1,500.00 | 4,800.00 | It is calculated as $ 6* 550 treatments + fixed cost of $ 1,500. |
| Total costs | 31,350.00 | 14,600.00 | 45,950.00 | ||
| Profits | 9,050.00 |
| Answer D | Actual | Simple Budget | Revenue and Spending Variance | Explain A |
| No. of treatments | 530.00 | 550.00 | ||
| Revenue | 53,000.00 | 55,000.00 | 2,000.00 | Unfavorable |
| Expenses | ||||
| Therapist | 21,280.00 | 22,000.00 | 720.00 | Favorable |
| Supplies | 1,795.00 | 2,200.00 | 405.00 | Favorable |
| Management | 5,125.00 | 5,500.00 | 375.00 | Favorable |
| Laundry | 220.00 | 200.00 | 20.00 | Unfavorable |
| Utilities | 1,505.00 | 1,400.00 | 105.00 | Unfavorable |
| Rent | 9,710.00 | 9,850.00 | 140.00 | Favorable |
| Repairs/cleaning | 5,080.00 | 4,800.00 | 280.00 | Unfavorable |
| Total Expenses | 44,715.00 | 45,950.00 | 1,235.00 | Favorable |
| Profits | 8,285.00 | 9,050.00 | 765.00 | Unfavorable |
| Answer B- Flexible Budget | Per unit | Variable amount | Fixed Cost | Total | Remarks |
| No. of treatments | 530.00 | ||||
| Average treatment fee | 100.00 | 53,000.00 | 53,000.00 | It is calculated as $ 100* 530 treatments. | |
| Therapist | 40.00 | 21,200.00 | 21,200.00 | It is calculated as $ 40* 530 treatments. | |
| Supplies | 4.00 | 2,120.00 | 2,120.00 | It is calculated as $ 4* 530 treatments. | |
| Management | 5,500.00 | 5,500.00 | It is a fixed cost and does not change with number of treatments. | ||
| Laundry | 200.00 | 200.00 | It is a fixed cost and does not change with number of treatments. | ||
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