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Andre has asked you to evaluate his business Andre s Hair Styling shampoo

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Andre has asked you to evaluate his business Andre s Hair Styling shampoo Powered By Docstoc
					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 .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.

Contribution margin per head = Hair cut price – Shampoo expense
                             = 12 - .40 = $11.60

Break even point is the point at which all the fixed costs are recovered and the company
is neither making profit nor loss. After this point the company starts making profits.

Break even point = Fixed cost / Contribution margin

Fixed cost = Barber’s compensation + Rent and other fixed expenses
           = 9.9*40*50*5 + 1750*12
           = 99000 + 21000
           = 120000

Break even point = 120000 / 11.6 = 10345(rounded)

Operating Income = Contribution @ 20000 hair cuts – Fixed Expenses
                = 20000*11.6 – 120000
                = 112000
New Contribution margin per head = Hair cut price – Shampoo expense – barber’s
compensation
                                 = 12 - .40 – 6 = $5.60


Break even point = Fixed cost / Contribution margin

New Fixed cost = Barber’s compensation + Rent and other fixed expenses
              = 4*40*50*5 + 1750*12
             = 40000 + 21000
             = 61000
New Break even point = 61000 / 5.6 = 10893(rounded)

				
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Description: Andre has asked you to evaluate his business Andre s Hair Styling shampoo