Question

Andre has asked you to evaluate his business, Andre’s Hair Styling. Andre has five barbers working for him. (Andre is not one of them.) Each barber is paid $9.90 per hour and works a 40-hour week and a 50-week year, regardless of the number of haircuts. Rent and other fixed expenses are $1,750 per month. Hair shampoo used on all clients is $0.40 per client. Assume that the only service performed is the giving of haircuts (including shampoo), the unit price of which is $12. Andre has asked you to find the following information.

Find the contribution margin per haircut. Assume that the barbers' compensation is a fixed cost. Show calculations to support your answer.

Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation. Show calculations to support your answer.

What will be the operating income if 20,000 haircuts are performed? Show calculations to support your answer.

Suppose Andre revises the compensation method. The barbers will receive $4 per hour plus $6 for each haircut. What is the new contribution margin per haircut? What is the annual break-even point (in number of haircuts)? Show calculations to support your answer.

Using the information provided, provide a memo to Andre explaining the completed analysis and how he should use this information to monitor the operations of the barber shop.  The memo should explain the cost associated with the barber shop including their relationships.

Excel Worksheet 2 paged

Answer 1

Charge per haircut = $12.00

Cost of shampoo per haircut = $0.40

Contribution margin per haircut = $11.60

Fixed expenses

Barbers' wages = $9.90*50*40*5 = $99,000

Rent and otehr expenses = $1,750

Total Fixed Expenses = $100,750

Annual break even point = Fixed expenses / Contribution margin = $100,750 / 11.60 = 8,686 hair cuts.

Breakeven point is the level of activity at which there is no profit or loss and the revenue equals expendture.

Therefore to calculate the break even point , we divide the fixed expenses by the contributio margin, since we should contribution margin equal to the fixed costs, whereby we can arrive at the number of haircuts to be done annually to breakeven. We can check this in the following way.

Contribution margin per haircut	$11.60
Breakeven point - number of haircuts	8686
Total contriution margin	$1,00,758
Total fixed expenses
Barbers' wages   - $9.90*50*40*5	$99,000
Annual Rent	$1,750
Total fixed expenses	$1,00,750
The difference between the total contribution
margin and the total fixed expenses is due to
rounding off of the number of haircuts.

Operating income with 20,000 haircuts

127250

Working:

Contribution margin with 20,000 haircuts ($11.40 x 20,000)	228000
Total fixed expenses	100750
Net operating income	127250

Charge per haircut		$12.00
Variable cost
Barbers' wages	$4.00
Shampoo	$0.40
Total variable cost		$4.40
Contribution margin		$7.60
Fixed Expenses
Barbers wages - $6.00*50*40*5	60000
Rent	1750
Total Fixed Expenses		61750
Breakeven number of haircuts (61,750 / 7.60)		8125
The breakeven point has come down because, some portion
($4.00) of the wages have been converted into variable
cost, which will reduce the fixed to be recovered.