Consider The Following Scenario And Has Asked You To Evaluat
Consider The Following Scenarioandre Has Asked You To Evaluate His Bu
Consider the following scenario: Andre has asked you to evaluate his business, Andre’s Hair Styling. Andre has five barbers working for him. 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. 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.
Paper For Above instruction
The evaluation of Andre's Hair Styling financials requires a detailed analysis of the contribution margin per haircut, the break-even point, the operating income at a specific volume, and the impact of a revised compensation structure on profitability. Each element will be addressed methodically to provide a comprehensive assessment.
Contribution Margin per Haircut under Original Compensation Structure
First, it's necessary to calculate the contribution margin per haircut, which is the selling price minus variable costs. The primary variable cost per client includes shampoo expenses, as labor costs are considered fixed and do not change with volume.
The unit price per haircut is $12, and the shampoo cost per client is $0.40. Therefore, the variable cost per haircut is $0.40.
Contribution Margin (CM) per haircut = Selling Price - Variable Costs = $12 - $0.40 = $11.60
This figure represents the amount available to cover fixed costs and generate profit after variable expenses are accounted for.
Calculating the Annual Break-even Point
Next, the annual fixed costs must be determined. The fixed costs consist of the total wages paid to the five barbers and fixed expenses like rent.
Each barber earns $9.90/hour and works 40 hours/week with 50 working weeks a year, leading to annual wages per barber of:
Wages per barber = $9.90 × 40 × 50 = $19,800
Total wages for 5 barbers = 5 × $19,800 = $99,000
Adding fixed expenses: Rent and other fixed costs = $1,750/month × 12 months = $21,000
Total fixed costs = $99,000 + $21,000 = $120,000
Break-even point in units (number of haircuts) = Total Fixed Costs / Contribution Margin per Haircut = $120,000 / $11.60 ≈ 10,344.83
Therefore, approximately 10,345 haircuts must be performed annually to break even.
This indicates that the business needs to perform roughly 10,345 haircuts in a year to cover all fixed costs with the current pricing and cost structure.
Operating Income at 20,000 Haircuts
To determine the operating income when 20,000 haircuts are performed, total revenue and total variable costs are calculated first.
Total revenue = 20,000 × $12 = $240,000
Total variable costs = 20,000 × $0.40 = $8,000
Contribution margin = Total revenue - Variable costs = $240,000 - $8,000 = $232,000
Fixed costs remain unchanged at $120,000. Therefore, operating income = Contribution Margin - Fixed Costs = $232,000 - $120,000 = $112,000
Thus, performing 20,000 haircuts results in an operating income of $112,000 under the current cost structure.
Impact of Revised Compensation Method
Under the new compensation plan, each barber earns $4 per hour plus $6 for each haircut.
Hourly wage component per barber = $4 × 40 hours/week × 50 weeks = $4 × 2,000 hours = $8,000
Total wages for 5 barbers = 5 × $8,000 = $40,000
Now, the wages are partially fixed ($8,000 per barber annually) plus variable earnings of $6 per haircut.
New Contribution Margin per Haircut
Given the price per haircut is still $12 and shampoo costs $0.40, the only variable costs are shampoo and the $6 per haircut paid to the barber under the new plan.
Variable costs per haircut = $0.40 (shampoo) + $6 (pay per haircut) = $6.40
New contribution margin per haircut = $12 - $6.40 = $5.60
This is significantly lower than the previous $11.60, reflecting the increased variable cost due to the new pay structure.
New Break-even Point
Calculate the total fixed wages: as computed, the fixed wages total $40,000, remaining unchanged regardless of volume.
Total fixed costs now are $40,000 (wages) plus fixed expenses of $21,000, totaling $61,000.
Break-even number of haircuts = Total fixed costs / New contribution margin per haircut = $61,000 / $5.60 ≈ 10,893 haircuts
Therefore, under the revised compensation system, approximately 10,893 haircuts are needed annually to break even.
This increase in the break-even volume indicates the business needs to perform more haircuts to cover the fixed wages and expenses under the new pay structure.
Conclusion
In summary, the contribution margin per haircut under the original scheme is approximately $11.60, with a break-even volume of about 10,345 haircuts annually and an operating income of $112,000 at 20,000 haircuts. Revisions in the compensation plan reduce the contribution margin to $5.60, increasing the break-even point to roughly 10,893 haircuts. These analyses highlight how compensation structures directly influence profitability and operational thresholds, emphasizing the importance of optimizing wages and fixed costs to enhance business performance.
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