Steve has five barbers working for him (he 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.  The only service performed are
haircuts, the unit price of each is $12.00.
1. Find the contribution margin per hair cut.  Assume barber's
compensation is a fixed cost.
2.  Determine the annual break-even point, in number of haircuts.
3.  What will be the operating incoe if 20,000 haircuts are performed?
4.  Suppose the compensation method is revosed.  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)?

Hi cjvalley!!


1. Find the contribution margin per hair cut.  Assume barber's
compensation is a fixed cost.

The assumption of barber's compensation is a fixed cost implies that
there are no variable costs 8this situation is common for services).
 
Contribution Margin = revenue from a haircut - variable cost per haircut =
                    = $12.00 - $0.00 =
                    = $12.00


2.  Determine the annual break-even point, in number of haircuts.

Calculate the total fixed costs:

Fixed costs = barber's compensation + Rent and other expenses =
            = 5 barbers * $9.90/hr * 40hr/wk * 50wk + 12 m * $1,750/m =
            = $99,000 + $21,000 =
            = $120,000

Using the breakeven formula:
Break-even = Fixed Costs / Contribution margin per haircut =
           = $120,000  / $12 =
           = 10,000 haircuts



3.  What will be the operating income if 20,000 haircuts are performed?

Operating Income = Revenues ? (Fixed Costs + Variable Costs) =
                 = 20,000 * $12 - ($120,000 + $0.00) =
                 = $240,000 - $120,000 =
                 = $120,000


4.  Suppose the compensation method is revised. 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)?

The plus of $6 per haircut added to the barber's compensation is a
variable cost, then:

Contribution Margin = revenue from a haircut - variable cost per haircut =
                    = $12.00 - $6.00 =
                    = $6.00

Fixed costs = barber's compensation + Rent and other expenses =
            = 5 barbers * $4/hr * 40hr/wk * 50wk + 12 m * $1,750/m =
            = $40,000 + $21,000 =
            = $61,000

Break-even = Fixed Costs / Contribution margin per haircut =
           = $61,000  / $6 =
           = 10,167 haircuts


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I hope that this helps you. Feel free to request for a clarification
if you need it.

Regards,
livioflores-ga