Question

In: Accounting

Tracy Stevens opened a hair salon, named “Tracy Trims” specializing in trims that maintain customer’s hairstyles....

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.).

Solutions

Expert Solution

  • 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.


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