Question

Vin Diesel owns the Fredonia Barber Shop.

He employs four barbers and pays each a base rate of $1,250 per month.

One of the barbers serves as the manager and receives an extra $500 per month.

In addition to the base rate, each barber also receives a commission of $4.50 per haircut.

Other costs are as follows:

Advertising $200 per month
Rent $1,100 per month
Barber supplies $0.30 per haircut
Utilities $175 per month plus $0.20 per haircut
Magazines $25 per month
Vin currently charges $10 per haircut.

Required:

(a) Determine the variable costs per haircut and the total monthly fixed costs.

(b) Compute the break-even point in units and dollars.

(c) Determine net income?

Answer 1

(a) $5; $7,000

(b) 1,400 haircuts ; $ 14,000

(c) $1,000.

Step-by-step explanation:

Barber's base rate (4 × 1,250) = $5,000

Total Fixed cost (TFC):

= Barber's base rate + Manager's salary + Advertising + Rent + Utilities + Magazines

= $5,000 + $500 + $200 + $1,100 + $175 + $25

= $7,000

(a) Variable cost per hair cut = 4.50 + 0.20 + 0.30

= $5

Contribution margin per unit = 10 - 5

= $5

(b) Break-even point in units:

= Total fixed cost ÷ contribution margin per unit

= 7,000 ÷ 5

= 1,400 haircuts

Break-even point in dollars = 1,400 × 10

= $ 14,000

(c) Assuming 1,600 haircuts per month,

Net income = (No. of haircuts × Contribution margin per unit) - TFC

= (1,600 × 5 ) - 7,000

= $1,000.