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Break Even Analysis: Evaluating Andre's Hair Styling

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.
- 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.

Solution Preview

Here are some notes for the answers in the attached Excel file.

1. Find the contribution margin per haircut. Assume that the barbers' compensation is a fixed cost. Show calculations to support your answer.

The contribution margin is the marginal income per unit sold. The formula is Per Unit Sales Price - Per Unit Variable Costs (VC). For Andre, the sales price is $12.00 and the VC is $0.40 per cut. Therefore his Contribution Margin (CM - the income he makes per haircut) is $11.60.

2. etermine the annual break-even point, ...

Solution Summary

This solution shows the contribution margin per haircut assuming that the barbers' compensation is at a fixed cost. It also shows the annual break-even point, in number of haircuts and the operating income if 20,000 haircuts are performed. Explanation of the calculations is provided in plain text and calculations are formatted in the attached Excel spreadsheet.

$2.19