Consider The Following Scenario And Has Asked You To 198251
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. Using the information provided, provide a memo to Andre explaining the completed analysis and how he should use this information to monitor the operations of the barber shop. The memo should explain the cost associated with the barber shop including their relationships. cite sources
Paper For Above instruction
Introduction
Understanding the financial dynamics of a small business such as Andre’s Hair Styling is essential for sustainable management and growth. This paper evaluates the contribution margin per haircut, the break-even point, operating income, and reallocates the compensation structure for the barbers. These analyses empower Andre with critical insights into his business’s profitability and operational efficiency, guiding strategic decisions and cost management.
Contribution Margin per Haircut
The contribution margin per unit (haircut) is the difference between the sales price per haircut and the variable costs directly associated with providing the service. It reflects the amount available to cover fixed costs and contribute to profit after variable expenses are paid.
Given data:
- Selling price per haircut: $12
- Variable cost per haircut (shampoo): $0.40
Since barber wages are considered fixed costs in this scenario, they do not influence the contribution margin calculation directly. Therefore:
Contribution Margin per Haircut = Selling Price - Variable Costs = $12 - $0.40 = $11.60
This means each haircut contributes $11.60 toward covering fixed costs and generating profit.
Calculating Fixed Costs
Fixed costs include barber salaries and other overheads:
- Each barber earns $9.90/hour
- Work week: 40 hours
- Work year: 50 weeks
Total annual wage per barber:
$9.90/hour × 40 hours/week × 50 weeks = $19,800
Total annual wages for five barbers:
$19,800 × 5 = $99,000
Monthly fixed costs:
$1,750 (rent) + fixed wage costs (annual wages divided by 12 months)
However, since wages are fixed costs, they are already accounted as fixed expenses.
Break-Even Point Calculation
The break-even point (number of haircuts) is where total revenue equals total fixed and variable costs, resulting in zero profit.
Total fixed costs per year:
- Wages: $99,000
- Rent: $1,750 × 12 = $21,000
Total fixed costs:
$99,000 + $21,000 = $120,000
Break-even point in units:
Break-even volume = Fixed Costs / Contribution Margin per Haircut
= $120,000 / $11.60 ≈ 10,345 haircuts
Therefore, approximately 10,345 haircuts must be performed annually to break even.
Operating Income at 20,000 Haircuts
Total revenue at 20,000 haircuts:
20,000 × $12 = $240,000
Total variable costs:
20,000 × $0.40 = $8,000
Total contribution margin:
20,000 × $11.60 = $232,000
Total fixed costs (wages + rent):
$120,000 (from previous calculation)
Operating Income:
Contribution Margin - Fixed Costs = $232,000 - $120,000 = $112,000
This indicates that performing 20,000 haircuts results in an operating profit of $112,000.
Impact of Revised Compensation Structure
Under the new compensation method:
- $4 per hour
- $6 per haircut
Calculations:
- Wages per barber per year:
($4/hour × 40 hours/week × 50 weeks) + ($6 × number of haircuts)
Wage component:
$4 × 40 × 50 = $8,000 annually per barber
Total wages for 5 barbers:
$8,000 × 5 = $40,000
Variable wages per haircut:
$6
Total wages for various numbers of haircuts:
Total wages = $40,000 + ($6 × number of haircuts)
Total fixed costs:
- Wages (fixed component): $40,000
- Rent: $21,000
- Total fixed costs: $61,000
Contribution margin per haircut:
Selling price - shampoo cost - variable wage per haircut
= $12 - $0.40 - $6 = $5.60
Break-even volume:
$61,000 / $5.60 ≈ 10,911 haircuts
This analysis indicates that with the revised compensation structure, approximately 10,911 haircuts are needed to break even.
Using Financial Analysis for Business Monitoring
For Andre’s Hair Styling, understanding contribution margins and break-even points is vital for operational control. The initial contribution margin of $11.60 per haircut demonstrates the substantial contribution towards covering fixed costs and generating profit. Recognizing the fixed costs, primarily wages and rent, enables accurate estimation of sales targets required for sustainability.
The revised compensation plan lowers the contribution margin to $5.60 per haircut, thus increasing the break-even volume. This emphasizes the importance of carefully structuring wages to balance competitiveness with profitability. Andre should monitor weekly and monthly haircut volumes against the break-even point, adjusting marketing and operational strategies to ensure he maintains profitability.
The operating income calculation illustrates the potential profits at higher sales levels, such as 20,000 haircuts, encouraging the pursuit of volume increases through advertising, excellent customer service, and loyalty programs. Moreover, understanding fixed versus variable costs helps Andre forecast how changes in sales volume impact overall profitability, enabling proactive management responses.
In conclusion, these financial insights should guide Andre in setting realistic sales goals, managing costs effectively, and making informed decisions about compensation policies. Regular financial reviews and performance metrics can ensure the business remains profitable and competitive in a dynamic market environment.
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