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-

For each option make a list of the variable and fixed cost

Calculate the break-even point in number of haircuts.

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?)

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

• Particulars	Option 1	Option 2	Option 3	Option 4
  Salary	180000	180000	0	0
  Lease-Equip	2400	2400	2400	2400
  Supplies	1500	1500	1500	1500
  Lease-Saloon	24000	12000	24000	12000
  Utilities	2400	2400	2400	2400
  Depreciation	4800	4800	4800	4800
  Total Fixed Costs	215100	203100	35100	23100
  Lease Rent	0	20%*Revenue	-	20%Revenue
  Commission		-	50%*Revenue	50% Revenue
  Total Variable Cost per Unit		20*0.2=4	20*0.5=10	20*0.7=14
  Contribution/Unit	20	16	10	6
  Break even Haircuts	215000/20=10750 Haircuts	12694 Haircuts	3510 Haircuts	1650 Haircuts

  Option 5:

  Monies Recovered in Wash, cut and Style= 50*80*12m = 48000

  Remaining fixed Costs= 215100-48000= 167100

  So, Haircuts required to break even = 167100/20=8355 Haircuts.

So in a month 80 wash,cut,styles and 8355/12= 696 Haircuts .

If worked for 5 days ,sales of the other two days will drop and impact adversely. however commision on sales will also get impacted.add this in your discussion .

For discussion please use number of units to break even under various plans.