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# Planning and Budgeting for Andre's Hair Styling

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Consider the following 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 (including shampoo), 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.

For this part I need an appropriate explanation.

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.

#### Solution Preview

See attached file.

Discussion:

The breakeven point is when the contribution margin, sales minus variable costs, is equal to the fixed costs. In other words, fixed costs divided by contribution margin per unit will give you the sales in units needed to cover fixed costs. See the computation to the left. The convention is to round up to the next unit since you cannot sell a part of a unit.

This problem is a bit unusual because hourly wages are usually a variable cost. However, the definition of a variable cost is one that "varies with activity." This appears to vary -- after all -- it is a per hour charge so doesn't it vary with the number ...

#### Solution Summary

See your computations attached in Excel. Click in cells to see computations. Your discussion is 442 words plus formulas and computations for breakeven, pro-forma profits, and contribution margin for the business.

\$2.19