Andre's Hair Styling

Topics: Variable cost, Costs, Management accounting Pages: 2 (573 words) Published: October 26, 2008
Andre of Andre’s Hair Styling is evaluating his business and has provided the following information about his company. 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. Hair shampoo used on all clients is .40 per client. Assume that the only service performed is the giving of haircuts (including shampoo), the unit price of which is $12. Based on the information provided, Andre wants you to find the contribution margin cost per haircut. The calculations are as followed. There are 5 barbers and they are paid $9.90 per hour. They work 40 hours a week and 50 weeks per year. This is considered a guaranteed salary (Onyiri, 2008). If you multiply $9.90 per hour times 40 hours a week by the 5 barbers they will make $396 a week per barber. To find the contribution margin per haircut you will need to do the following calculations. Selling price per unit= $12 and variable cost per unit =$.40 = $12 – 0.40 =$11.60 Contribution margin (CM) = selling price- variable cost= $11.60 Now Andre wants you to look at the information given and determine what his annual break-even point, in the number of haircuts needed, will be. To do this we will need to know what a break-even point is. A Break-even point is where a sale levels where there is no profit or loss. This number let Andre know if the business is worth continuing or if he should shut down.

What is the fixed cost?
Barbers salaries: 9.90 x 40 x 50 x 5 = $99,000 Annual Rent = monthly rent x 12 months = $1750 x 12 = $21,000 Total fixed = salary + annual rent = $99,000 + 21,000 = $120,000 Break even = total fixed cost/ cm = $120,000/11.60 = $10,345 rounded up So the total number of haircuts that should be performed in order for Andre to stay in business should be around 17 haircuts a day.

If he does 20,000...

References: Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., Schatzberg, J (2008) Introduction to Management Accounting Chapters 1-17, 14th Edition, Pearson Prentice Hall., Onyiri, Sunny, online chat session, Retrieved September 21, 2008.
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