Question

Sunland Diesel owns the Fredonia Barber Shop. He employs 4 barbers and pays each a base rate of $1,440 per month. One of the barbers serves as the manager and receives an extra $520 per month. In addition to the base rate, each barber also receives a commission of $9.15 per haircut. Other costs are as follows.

Advertising $240 per month
Rent $1,100 per month
Barber supplies $0.35 per haircut
Utilities $185 per month plus $0.10 per haircut
Magazines $35 per month Sunland currently charges $16 per haircut.

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. Prepare a CVP graph, assuming a maximum of 1,800 haircuts in a month. Use increments of 300 haircuts on the horizontal axis and $3,000 on the vertical axis.
d. Determine net income, assuming 1,600 haircuts are given in a month.

Answer 1

a. Variable costs = $9.60 and Fixed Costs = $7,840

b. 1,225 haircuts and $19,600

c. See attachment

d. $2,400

Step-by-step explanation:

Variable Costs per haircut Calculations

Barber supplies $0.35

Utilities $0.10

Commission $9.15

Total Variable Costs per haircut $9.60

Total Monthly Fixed Costs Calculation

Base Salary (1,440 × 4 + 520) $6,280

Advertising $240

Rent $1,100

Utilities $185

Magazines $35

Total Monthly Fixed Costs $7,840

Contribution per unit = Selling price per unit - Variable Cost per unit

= $16.00 - $9.60

= $6.40

Contribution Margin Ratio = Contribution ÷ Selling Price

= $6.40 ÷ $16.00

= 0.40

Break-even point (units) = Fixed Cost ÷ Contribution per unit

= $7,840 ÷ $6.40

= 1,225 haircuts

Break-even point (dollars) = Fixed Cost ÷ Contribution Margin Ratio

= $7,840 ÷ 0.40

= $19,600

Net income, assuming 1,600 haircuts are given in a month [calculation]

Contribution (1,600 × $6.40) $10,240

Less Fixed Costs ($7,840)

Net Income/(loss) $2,400