Megatron Barber provides a standardised hair design and care service to customers. The price for each treatment is $60. At the beginning of February 2021, the owner proposed that Megatron Barber should launch a promotion since February is a traditional off-peak season. In this promotion, the selling price of each hair design would be reduced to $54, and the owner estimated that the promotion would increase sales volume by 40% compared with the sales volume in Feb 2020 (1,500 treatments). The owner of Megatron Barber reviewed the financial results for February 2021 after launching the promotion plan and compared them with the results in February 2020 (no promotion plan). He approaches you for help as he has some difficulties understanding the results. An extract of Megatron Barbers’ financial information for both February 2020 and 2021, based on sales of treatments, was as follows: Feb 2020 Feb 2021 Sales volume (units) 1,500 1,950 Selling price/unit ($) 60 54 Variable cost/unit ($) 30 30 Contribution margin/unit ($) 30 24 Total fixed costs ($) 42,000 45,000 Monthly profit ($) 3,000 1,800 Breakeven point in units 1,400 1,875 Margin of safety (%) 6.67% 3.85% Operating leverage (%) 48.28% 43.48% Do you believe it was a good idea to launch the promotion? Discuss by comparing Feb 2020 and Feb 2021 for the following: 1) sales volume, 2) profit, 3) breakeven point, 4) margin of safety, and 5) operating leverage. State any assumptions you need to make.
Megatron Barber provides a standardised hair design and care service to customers. The price for each treatment is $60. At the beginning of February 2021, the owner proposed that Megatron Barber should launch a promotion since February is a traditional off-peak season. In this promotion, the selling price of each hair design would be reduced to $54, and the owner estimated that the promotion would increase sales volume by 40% compared with the sales volume in Feb 2020 (1,500 treatments).
The owner of Megatron Barber reviewed the financial results for February 2021 after launching the promotion plan and compared them with the results in February 2020 (no promotion plan). He approaches you for help as he has some difficulties understanding the results.
An extract of Megatron Barbers’ financial information for both February 2020 and 2021, based on sales of treatments, was as follows:
|
|
Feb 2020 |
Feb 2021 |
|
Sales volume (units) |
1,500 |
1,950 |
|
Selling price/unit ($) |
60 |
54 |
|
Variable cost/unit ($) |
30 |
30 |
|
Contribution margin/unit ($) |
30 |
24 |
|
Total fixed costs ($) |
42,000 |
45,000 |
|
Monthly profit ($) |
3,000 |
1,800 |
|
Breakeven point in units |
1,400 |
1,875 |
|
Margin of safety (%) |
6.67% |
3.85% |
|
Operating leverage (%) |
48.28% |
43.48% |
Do you believe it was a good idea to launch the promotion? Discuss by comparing Feb 2020 and Feb 2021 for the following: 1) sales volume, 2) profit, 3) breakeven point, 4) margin of safety, and 5) operating leverage. State any assumptions you need to make.
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