Andre’s Hair Styling Essay

1096 Words Feb 5th, 2013 5 Pages

American InterContinental University

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Andre has asked me to look over his existing way of doing business. His questions revolve around contribution margin, fixed costs, and variable costs. His questions are answered in detail. An Excel spreadsheet is included. Andre has a thriving barber shop business with five full time barbers working for him. He asked me to look at his business and determine if paying the barbers by the haircut with little hourly salary is better than his current business plan of paying the five barbers a larger hourly payment with no additional pay per haircut. He asked that I answer the following four questions.
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The total fixed costs annually will now be divided by the contribution margin figured in problem number 1 which was $11.60:
$120,000 / $11.60 = 10,345 (rounded)
10,345 haircuts will be needed annually to reach the break-even point.
3. What will be the operating income if 20,000 haircuts are performed?
This is figured by first calculating the gross profit. This is figured by taking the number of units and multiplying by the contribution margin:
20,000 (units) * $11.60 (CM) = $232,000
Next we will subtract the annual fixed costs previously figured to be $120,000 from the gross profit:
$232,000 - $120,000 = $112,000
$112,000 is the operating income if 20,000 haircuts are performed.
4. Suppose Andre revises the compensation method. The barbers will receive $4.00 per hour plus $6.00 per each haircut. What is the new contribution margin per haircut? What is the annual break-even point (in number of haircuts)?
To figure the revised compensation method, we first need to refigure our contribution margin. Since Andre is now going to pay each barber $6.00 per hair cut, and since haircut amounts are unknown at this time, we will consider $6.00 an additional variable cost making our variable cost now $6.40 (added shampoo cost of $0.40). This will be deducted for the cost of the $12.00 haircut:
$12.00 - $6.40 = $5.60
$5.60 is the contribution margin per haircut.
Next we have to refigure the new labor overhead costs. The barbers’ pay has dropped from $9.90

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