Andre has asked you to evaluate his business, Andre’s Hair Stylling. 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. Assume that the only service performed is the giving of haircuts, 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.
- 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.
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Solution Preview
Contribution margin: Sales less variable cost of goods sold and variable selling and administrative expenses.
- The contribution margin is $12 since there are no …
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