Evaluating a Business: Andre's Hair Styling
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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 Summary
This solution provides detailed calculations and explanation for both old and new contribution margin and annual breakeven point.
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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 ...
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