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Evaluating a Business: Andre's Hair Styling

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. Assume that the only service performed is the giving of haircuts, the unit price of which is $12. Andre has asked you to find the following information.

1. Find the contribution margin per haircut. Assume that the barbers' compensation is a fixed cost?
2. Determine the annual break-even point, in number of haircuts?
3. What will be the operating income if 20,000 haircuts are performed?
4. 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)?

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Solution Preview

1. Contribution margin equals to the difference between sales price and variable cost:
CM= contribution margin
SP = sales price
VC= variable cost

CM = SP - VC
SP = $12 /hr
The only variable cost is the amount paid to a barber per haircut :
VC = $ 9.9/hr
So our contribution margin per haircut would be :
CM= 12-9.9 = $2.1/hr

2. Annual breakeven point occurs at the quantity of hours where annual contribution margin equals to annual fixed costs and the ...

Solution Summary

This solution provides detailed calculations and explanation for both old and new contribution margin and annual breakeven point.