1247 Words5 Pages

Our office had received a request from Andre, owner of Andre 's Styling Saloon to perform an evaluation on his business.

Andre has five barbers that work in the establishment and each employee received a salary of $9.90 per hour and works a 40-hour week and a 50-week year, regardless of the number of haircuts. As rent and other fixed expenses he expends $1,750 every month, plus $ 0.40 as the cost of hair shampoo used on all his clients. This saloon is performing haircuts exclusively and each client paid a flat price of $ 12.00.

He wanted for us to evaluate a new compensation method for his employees. Under the new system the barbers will receive a flat salary of $4 per hour, and a commission of $ 6.00 for each haircut. In this case*…show more content…*

Net Operating Income - NOI

A company 's operating income after operating expenses are deducted, but before income taxes and interest are deducted. If this is a positive value, it is referred to as net operating income, while a negative value is called a net operating loss (NOL).

Notes:

NOI is often viewed as a good measure of company performance. Some believe this figure is less susceptible than other figures to manipulation by management.

(Investopedia (2005))

OPERATING INCOME = REVENUES (FIXED COSTS + VARIABLE COSTS)

Revenue calculations: $ 240,000

20,000 * $ 12.00 = $ 240,000

Overhead Cost:

Rent: $ 1,750 per month, Yearly cost: $ 21,000

1750* 12 = 21,000 or $ 21,000

Fixed Cost $ 120,000

Salaries + Overhead Cost

99,000 + 21,000 = 120,000 or $ 120,000

Variable Cost $ 8,000

Variable cost: 20,000 * 0.40 = $ 8,000

OPERATING INCOME= $ 112,000

OPERATING INCOME = REVENUES (FIXED COSTS + VARIABLE COSTS)

240,000 (120,000 + 8,000)

240,000 128,000 = $ 112,000

4. 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.

Barber 's Salary by Week: $ 160.00

Price per hour = $ 4, hours per week = 40

Weekly salary per barber: 4 * 40 = 160 or $ 160.00

Barber 's Salary by year: $ 8,000

Weekly salary per barber =

Andre has five barbers that work in the establishment and each employee received a salary of $9.90 per hour and works a 40-hour week and a 50-week year, regardless of the number of haircuts. As rent and other fixed expenses he expends $1,750 every month, plus $ 0.40 as the cost of hair shampoo used on all his clients. This saloon is performing haircuts exclusively and each client paid a flat price of $ 12.00.

He wanted for us to evaluate a new compensation method for his employees. Under the new system the barbers will receive a flat salary of $4 per hour, and a commission of $ 6.00 for each haircut. In this case

Net Operating Income - NOI

A company 's operating income after operating expenses are deducted, but before income taxes and interest are deducted. If this is a positive value, it is referred to as net operating income, while a negative value is called a net operating loss (NOL).

Notes:

NOI is often viewed as a good measure of company performance. Some believe this figure is less susceptible than other figures to manipulation by management.

(Investopedia (2005))

OPERATING INCOME = REVENUES (FIXED COSTS + VARIABLE COSTS)

Revenue calculations: $ 240,000

20,000 * $ 12.00 = $ 240,000

Overhead Cost:

Rent: $ 1,750 per month, Yearly cost: $ 21,000

1750* 12 = 21,000 or $ 21,000

Fixed Cost $ 120,000

Salaries + Overhead Cost

99,000 + 21,000 = 120,000 or $ 120,000

Variable Cost $ 8,000

Variable cost: 20,000 * 0.40 = $ 8,000

OPERATING INCOME= $ 112,000

OPERATING INCOME = REVENUES (FIXED COSTS + VARIABLE COSTS)

240,000 (120,000 + 8,000)

240,000 128,000 = $ 112,000

4. 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.

Barber 's Salary by Week: $ 160.00

Price per hour = $ 4, hours per week = 40

Weekly salary per barber: 4 * 40 = 160 or $ 160.00

Barber 's Salary by year: $ 8,000

Weekly salary per barber =

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