American InterContinental University
[Type the author name]
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. 1.Find the contribution margin per haircut. Assume that the barbers’ compensation is a fixed cost. Show calculation to support your answer Contribution margin is determined by using the selling price of the product, which in this scenario is $12.00 for the haircuts, and subtracting the variable costs. In this scenario the variable cost would be the $0.40 for the cost of the shampoo since the barbers’ compensation in this problem is listed as a fixed cost. The math for this problem is very basic: $12.00 - $0.40 = $11.60
The contribution margin per hair cut would be $11.60.
2.Determine the annual break-even point, in number of haircuts. Support your answer with an appropriate explanation. Show calculations to support your answer. In order to determine the number of haircuts it takes to reach the break-even point we must first find the total annual dollar amount of fixed costs. This will be calculated by taking the annual salary of the 5 barbers, $9.90 hr * 40 hrs a week * 50 weeks: $9.90 * 40 * 50 = $19,800 * 5 (barbers) = $99,000. We will add this $99,000 to the fixed cost of rent and other fixed expenses of $1,750 per month * 12 months to annualize: $1,750 * 12 = $21,000 a year. So to get the annual fixed cost amount we...