Question

You run a nail salon. Fixed monthly cost is $5,966.00 for rent and utilities, $5,971.00 is spent in salaries and $1,193.00 in insurance. Also every customer requires approximately $3.00 in supplies. You charge $101.00 on average for each service. You are considering moving the salon to an upscale neighborhood where the rent and utilities will increase to $11,697.00, salaries to $6,323.00 and insurance to $2,332.00 per month. Cost of supplies will increase to $7.00 per service. However you can now charge $161.00 per service. At what point will you be indifferent between your current location and the new loaction?

Answer 1

Let the number of services to be indifferent between current location and the new location = Y

For Current Location

Revenue per services = $ 108

Variable cost per service = $ 3

Fixed cost = Rent + Salaries + Insurance

= 5,966+5,971+1,193

=$ 13,130

Profit = Sales - Variable cost - Fixed costs

= 101Y- 3Y-13,130

For New Location

Revenue per service = $ 161

Variable cost per service = $ 7

Fixed cost = Rent + Salaries + Insurance

= 11,697 + 6,323 + 2,332

= $ 20,352

Profit = Sales - Variable cost - Fixed costs

= 161Y-7Y-20,352

To be indifferent , profit from both the location must be same

101Y-3Y-13,130= 161Y-7Y-20,352

98Y-13,130 = 154Y-20,352

154Y-98Y= 20,352-13,130

56Y = 7,222

Y = 7,222/56

= 129

Hence , indifference point = 129 services