Aiu Unit 3 Ip

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 $0.40 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.

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

Contribution Margin = Hair Cut price (Revenue) – Shampoo expense (Variable expense)

12 – 0.4 = 11.60 Contribution Margin = 11.60

2. Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation. Show calculations to support your answer.

Fixed costs = workers + rent

Barber’s compensation: 9.9 x 40 x 50 x 5 = 99,000

Rent and fixed expenses: 1,750 x 12 = 21,000

Total fixed cost: 99,000 + 21,000 = 120,000

Break-even point = fixed cost / contribution margin

Contribution margin per head = 11.6

120,000/11.6 = 10344.83

3. What will be the operating income if 20,000 haircuts are performed? Show calculations to support your answer.

Total contribution = revenue – variable costs

Hair cut price: 12.00

Variable Expense: 0.4

Barber’s compensation: 6

12 – 0.4 – 6 = 5.6

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.

Fixes costs = workers