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, the unit price which is $12. Andre has asked you find the following:
1. Determine the annual break-even point, in the number of haircuts
2. What will be the operating income if 20,000 haircuts are performed?
3.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)?
How do i figure out without knowing how many haircuts were done for the first question
1. To determine the annual break-even point, we need to find the number of haircuts that need to be performed in order to cover all the fixed and variable expenses.
First, let's calculate the total fixed expenses for the year. Given that the rent and other fixed expenses are $1,750 per month, the total fixed expenses for the year would be:
Total Fixed Expenses = $1,750 per month * 12 months = $21,000 per year
Next, let's calculate the total variable expenses per haircut. Each haircut requires the use of hair shampoo costing $0.40 per client. Since there is no information on the number of clients per haircut, let's assume an average of one client per haircut. Therefore, the variable expense per haircut is:
Variable Expenses per Haircut = $0.40
The contribution margin per haircut is the difference between the unit price of $12 and the variable expenses per haircut:
Contribution Margin per Haircut = $12 - $0.40 = $11.60
To calculate the break-even point in terms of the number of haircuts, we divide the total fixed expenses by the contribution margin per haircut:
Break-even Point (in number of haircuts) = Total Fixed Expenses / Contribution Margin per Haircut
Break-even Point = $21,000 / $11.60 = 1,810.34 haircuts
Since we cannot have fractional haircuts, the annual break-even point would be 1,811 haircuts.
2. To calculate the operating income if 20,000 haircuts are performed, we need to find the total revenue and subtract the total expenses.
Total Revenue = Number of Haircuts * Unit Price
Total Revenue = 20,000 haircuts * $12 = $240,000
Total Expenses = Total Fixed Expenses + (Variable Expenses per Haircut * Number of Haircuts)
Total Expenses = $21,000 + ($0.40 * 20,000) = $29,000
Operating Income = Total Revenue - Total Expenses
Operating Income = $240,000 - $29,000 = $211,000
Therefore, the operating income if 20,000 haircuts are performed would be $211,000.
3. If Andre revises the compensation method for the barbers to $4 per hour plus $6 for each haircut, we need to recalculate the contribution margin per haircut and the break-even point.
The new variable expenses per haircut would be $4 (hourly wage) + $6 (commission for each haircut) = $10.
New Contribution Margin per Haircut = $12 (unit price) - $10 (variable expenses per haircut) = $2.
To calculate the new break-even point, we divide the total fixed expenses by the new contribution margin per haircut:
Break-even Point (in number of haircuts) = Total Fixed Expenses / New Contribution Margin per Haircut
Break-even Point = $21,000 / $2 = 10,500 haircuts.
Therefore, the new contribution margin per haircut would be $2, and the new annual break-even point would be 10,500 haircuts.