Andre has a hair styling business and he has five barbers who each make $9.90 per hour then work 40-hours a week and 50-weeks a year, the rent and other fixed expenses are $1,750 per month. shampoo is used on all client is .40 per client, the unit price of the haircut is $12. Andre has asked you to find the following:
1. Determine the annual break-even point, in number of haircuts.
2. What will the operating income if 20,000 haircuts are performed?
3. What if 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 numbers of haircuts)?
I believe earlier this week I posted a method for solving this very problem.
Use basic algebra to solve. Let HC be hair cuts. Break even occurs when total costs equal total revenue. Annual wage expenses (W) are 9.9*40*50*5=99000., (9.90 per hour times 40 hrs per week times 50 weeks times 5 barbers).
So, total costs are 1750 + 99000 + 0.4*HC. Total revenue is 12*HC. Break even is therfore 12*HC - 1750 - 99000 - .4*HC = 0.
Solve for HC.
2) Instead of solving for HC, simply plug 20000 for HC in the above equation.
3) adjust the equation, what is the new fixed cost of labor, what is the variable cost of each hair cut.
2 answers