Operating income and break even point
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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. Show calculations to support your answer.
2. Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation.
3. What will be the operating income if 20,000 haircuts are performed? Show calculations to support your answer.
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)? Show calculations to support your answer.
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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. It shows how the annual income is affected by the changes in operating costs.
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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 ...
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