Ned's New Wave Barber Shop

Ned's New Wave Barber Shop

Ned's New Wave Barber Shop specializes in modern unisex haircuts. The only service available at Ned's is a “20-minute” haircut for which the customer is charged $10.

The shop has five (5) barbers. (Ned does not work in the shop and, as owner/entrepreneur, he takes no salary.) Each barber is paid an annual salary of $18,000. All equipment including store fixtures and barbering equipment is leased on an annual basis at $4,500 per year. Building space is leased at the rate of $500 per month (or $6,000 per year). Ned is concerned about the shop’s cost structure and seeks your advice.

1. Compute the contribution margin per haircut.

Expenses:

Fixed: Annual salary $18000 x 5 barbers = $90,000

Fixed: Equipment (Store fixtures, barbering tools etc) = $4,500

Fixed: Shop lease $500 x 12 per year = $6,000

Total Fixed cost = 100,500.00

Contribution margin per haircut = Unit Price - variable cost = $10

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

The break-even point is defined as the point where sales or revenues equal expenses.

There is no profit made or loss incurred at the break-even point.

Expenses:

Annual salary $18000 x 5 barbers = $90,000

Equipment (Store fixtures, barbering tools etc) = $4,500

Shop lease $500 x 12 per year = $6,000

Total expenses 100,500.00

Income to make breakeven = $100,500.00

Number of haircuts to break even = Fixed Cost / Unit Contribution Margin

Number of haircuts to break even = $100,500.00/$10 = 10,050 haircuts

3a. Last year, Ned's performed 15,000 haircuts. What was the total profit or loss? What was the profit or loss per haircut?

Revenue from 15000 hair cuts = 15000*10 = $150,000

Profit = Total Revenue - Total Cost = 150,000 - 100,500.00 = $49,500

Total Profit = $49,500

Total Profit/ hair cut = $49,500/ 15,000 = $3.3

3b. What would total profit and profit per haircut have been at 10% higher volume, i.e., 16,500 haircuts?

Revenue from 16,500 hair cuts = 16500*10 = $165,000

Profit = Total Revenue - Total Cost = 165,000 - 100,500.00 = $64,500

Total Profit = $64,500

Total Profit/ hair cut = $64,500/ 16,500 = $3.9

3c. What would total profit and profit per haircut have been at 10% lower volume, i.e., 13,500 haircuts?

Revenue from 13,500 hair cuts = 13500*10 = $135,000

Profit = Total Revenue - Total Cost = 135,000 - 100,500.00 = $34,500

Total Profit = $34,500

Total Profit/ hair cut = $34,500/ 13,500 = $2.56

4. Ned is considering making changes in how he pays the barbers and the landlord.

a) The first possibility is to change how the barbers are paid. Rather than receiving a salary, the barbers would instead receive a 50% commission on the sale of each haircut. What is the new contribution margin per haircut? What is the new annual break-even point in number of haircuts?

Expenses:

Fixed: Equipment (Store fixtures, barbering tools etc) = $4,500

Fixed: Shop lease $500 x 12 per year = $6,000

Total Fixed cost = $10,500

Variable cost is commission per haircut = 50% of $10 = $5

Contribution margin per haircut