Purchase Solution

Fixed and variable costs and profitability

Not what you're looking for?

Ask Custom Question

Scenario:
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, 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.

Purchase this Solution
Solution Summary

The solution presents systematically how the contribution margin and break even point is calculated. It also presents how changes in the fixed and variable costs affects the contribution margin and break even point. One can undersatnd how operating costs affect the profitability and break even point by going through this problem.

Solution Preview

See the attached file. Thanks

Business Evaluation

No of barbers 5
Wage rate 9.9 $ per hour
Hair shampoo Cost $0.40 per client
No of hours per week 40
No of weeks in a year 50
Rent and other fixed Expenses 1750 $
Unit price for haircut 12 $

"The contribution margin per haircut. Assume that the barbers compensation is a fixed cost.
"

Contribution Margin per unit = Selling Price per unit - Variable cost per unit
Variable cost per unit $0.40 Only ...

Purchase this Solution
Free BrainMass Quizzes
Basics of corporate finance

These questions will test you on your knowledge of finance.

MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

View More Free Quizzes
Related BrainMass Solutions

  • What differentiates a variable from a fixed cost including examples

    What effect could an increase in fixed costs have on the break-even point, operating leverage, and profitability? What differentiates a variable from a fixed cost? Variable costs are costs that change directly with changes in unit produced.

  • Ensco Lighting Company

    159284 Ensco Lighting Company has fixed costs of $100,000, sells its units for $28, and has variable costs of $15.50 per unit.

  • Antique fixed versus variable cost

    First, the behavior of costs - fixed or variable - depends on the cost object being observed and the time horizon. Second, in the long run, all costs become variable. Next, the behavior of costs affects the profitability of a business.

  • Airline Rescheduling Profitability

    Current Profits= Total Revenue -Fixed costs-variable costs =140-100-38 =$2mn New Profits (at 75% capacity) New Revenues= 140*75/70= $150 New variable costs= 38*75/70= $40.71mn New Profits= 150-100-41.71 =$8.29 mn (As Fixed costs will

  • Relationship of cost and sales volume

    Explain (utilizing specific examples) the relationship of costs and sales volume as it affects profitability.

  • Considering Income Statements for Three Companies

    The cost structure of an organization significantly affects its profitability. For example, the proportion of its costs into variable and fixed affects its profitability specifically when sales are down. Look at company C for instance.

  • Break-Even Analysis Managerial Finance

    159283 Ensco Lighting Company has fixed costs of $100,000, sells its units for $28, and has variable costs of $15.50 per unit.

  • Accounting:Cost-volume-profit analysis.

    363297 Break-even sales: Changes in price, variable and fixed costs, contribution margin Assume the following: Sales of 5000 units per month Price of $12.50 per unit Revenue of $62,500 Variable Cost of $6.00 per unit Fixed Costs of $15,000

  • Allocation of Fixed Costs: Herrestad Company

    Profitability will be reviewed in two parts, first we will analyze the contribution margin, and then product line profitability overall, including fixed costs.

  • Dabney Company

    costs 24,000 Variable manufacturing costs (at $8 per unit) 60,480 Fixed selling expenses 70,000 Variable selling expenses (at $2 per unit) 15,120 Required: 1.

View More Related Solutions