Contribution and Compensation for Andre's Hair Stylling
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Andre has asked you to evaluate his business, Andre's Hair Stylling. 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.
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Solution Summary
This solution is comprised of a detailed explanation to calculate the contribution margin per haircut, determine the annual break-even point, in number of haircuts, what is the new contribution margin per haircut, and what is the annual break-even point (in number of haircuts).
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Find the contribution margin per haircut. Assume that the barbers' compensation is a fixed cost. Show calculations to support your answer.
Contribution margin per haircut = Income per haircut - Variable costs per haircut
Variable costs per haircut = Hair Shampoo per client
Therefore, the contribution margin per haircut is
= $12 - $0.40
= $11.60
Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation. Show calculations to support your answer.
First, we can find the break-even point in units by using the following contribution margin ...
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