Question

Tracy Stevens opened a hair salon, named “Tracy Trims” specializing in trims that maintain customer’s hairstyles. The only service available at Tracy’s Trims is minor variations on a “30 minute” haircut for which the customer is charged $20. The shop has five (5) newly trained “trimmers.” (Tracy does not work in the salon. And, as owner/entrepreneur, she takes no salary.)

Her annual cost structure is as follows:

Trimmer annual salary (per person):                                       $36,000

Leases equipment cost per year: 2,400

Store fixtures depreciation per month                                       400

Hair cutting supplies per year 1,500

Salon Lease per month 2,000

Utilities per month on average 200

Tracy is looking at her cost structure and is concerned about making a profit. She is looking at three options:

Option 1:             All cost remain the same as shown above

Option 2:            The landlord has given her the option to pay $1000 per month rent plus 20% of the monthly total revenue.

Option 3.            Pay the trimmer a 50% commission on each hair cut instead of the annual salary.

Option 4:             both Option 2 and Option 3 together

Option 5:             If all costs remain the same as shown above in option 1, and Tracy introduces a new 1-hour service called “wash, cut, and style” and can charge $50 for this service, monthly demand for this service is 80 bookings. How many “Tracy Trims” and “wash, cut, and Style” should the business try to book each month?

Instructions: discuss with your group-

1. For each option make a list of the variable and fixed cost
2. Calculate the break-even point in number of haircuts.
3. Calculate the net income per month use your own sales projections! What happens if all 5 employees are fully booked 5 days a week, which option gives the most profit? What if sales are not good and employees are not fully booked?)
4. Discuss with your group what are the advantages and disadvantages of each option (e.g. what happens when the salon makes lots of sales vs small amount of sales.).

Answer 1

	BEP (Monthly Haircuts)
Option 1	Fixed cost/Sales	17925/20	897 Monthly Haircuts
Option 2	Fixed cost/Sales-Landlord commission	16925/18	941 Monthly Haircuts
Option 3	Fixed cost/Sales-Trimmer commission	2925/10	293 Haircuts
Option 4	Fixed cost/Sales-Landlord commission-Trimmer commission	1925/8	241 Haircuts

Option 5
Extra Income	80*50	4000
	Fixed cost-extra income	17925-4000	13925
BEP (Monthly Haircuts)	Fixed cost/Sales	13925/20	697 Haircuts
			80 wash and style

Projected Revenue
Working 40 Hrs per trimmer per week
Total Productive hrs	200 HRS
Monthly Utilized hrs	800 HRS
Haircut count (30 mnts per cut)	1600 CUTS
Monthly Revenue (20 per cut	$ 32,000.00

Option 1 Cost			Option 2 Cost	Option 3 Cost	Option 4 Cost
Expenses	Annual Amount	Monthly Amount	Monthly Amount	Monthly Amount	Monthly Amount
Salaries	$         1,80,000.00	$            15,000.00	$                       15,000.00
Equipment cast	$               2,400.00	$                  200.00	$                             200.00	$                     200.00	$                     200.00
Depreciation	$               4,800.00	$                  400.00	$                             400.00	$                     400.00	$                     400.00
Hair cutting supplies	$               1,500.00	$                  125.00	$                             125.00	$                     125.00	$                     125.00
Lease	$            24,000.00	$               2,000.00	1000+20% of sale	$                 2,000.00	1000+20% of sale
Utilities	$               2,400.00	$                  200.00	$                             200.00	$                     200.00	$                     200.00
Landloar commission				$                              -
Total Expenses	$         2,15,100.00	$            17,925.00	$ 16,925.00	$    2,925.00	$ 1,925.00

Monthly Projected Profit(Sales - Cost)
Option 1	32000-17925	$ 14,075.00
Option 2         (1600*18)	28800-16925	$ 11,875.00
Option 3         (1600*10)	16000-2925	$ 13,075.00
Option 4         (1600*8)	12800-1925	$ 10,875.00

Option 5

32000-13925

$ 18,075.00

Option 3 should be opted for low risk and average profit. However in Option 5 cost is reduced due to extra Income, that is always advantage for business.