Budgeting

Introduction

I have been asked to evaluate the business Andre's Hair Styling. Andre employee's five barbers who are paid $9.90 per hour, work 40 hours per week, and work 50 weeks a year. It cost $1,750 for rent and other fixed expenses. It cost .40 per client to use shampoo. I am assuming that giving the haircut is the service that is provided which is $12 unit price. Andre has asked me to calculate certain information for him which I will address in this paper. A conclusion follows with some information on these calculations.

Calculations

The first figure that I have been asked to calculate is the per haircut contribution margin per haircut. To figure this I took Unit Sales Price - Unit variable cost. Unit contribution margin = $12.00 - .40 = $11.60.

The second figure that I have been asked to calculate is the number of haircuts annual break-even point. In order for this business to have total fixed cost equal to sales is to generate the right amount of sales. The business has to survive which is why they have to figure how many haircuts are needed to do that. This is where the break-even point comes into play. To find the breakeven point I took the total yearly expenses and divided that by the unit contribution margin. Break-even point = 120,000 / $11.60 = 10,345.

Now Andre has asked me to calculate the operating income when the number of haricust increase to 20,000 haircuts performed. Operating income = total revenues - total cost. Total revenue is 20,000 (haircuts) * 12 (months) = 240,000. Total cost is total fixed costs - variable costs. Total fixed costs = total wages per year (1,980 wages per week * 50 weeks per year = 99,000) + total expenses per year (1,750 * 12 months = 21,000). 99,000 + 21,000 = 120,000. Variable costs = .40 * 20,000 haircuts = 8,000. Operating income = 240,000 + 120,000 = 112,000.

The fourth figure that I have been asked to calculate is the new per haircut contribution margin and the annual break-even point when his method of compensation has been