Question

The problem is that you need to borrow money to start the business and your banker has asked for a break- even analysis. You have prepared the following cost estimates of your first year of operations. Fixed Costs $105,000 Salaries $36,000 Rent and Utilities $2,000 Advertising $3,000 Equipment Variable Cost per Dog $2.00 Shampoo $1.50 Coat conditioner $0.75 Pet cologne $1.25 Dog treats $0.50 Hair ribbons You went online and researched grooming prices in your area. Based on your review, you have decided to charge $32 for each grooming.
Please give detail explanation! THANKS!

Answer 1

PART 1

1)

Fixed costs
Salaries	$        1,05,000
Rent and Utilities	$            36,000
Advertising	$              2,000
Equipment	$              3,000
Total fixed costs	$        1,46,000

Variable cost
Shampoo	$       2.00
Coat Conditioner	$       1.50
Pet Cologne	$       0.75
Dog treats	$       1.25
Hair ribbons	$       0.50
Total variable cost	$       6.00

Break-even point = Fixed cost/Contribution per unit

Contribution per unit
Service charge	$                    32
Variable cost	$                      6
Contribution	$                    26

Total fixed costs	$        1,46,000
Contribution per unit	$                    26
Break even point	5,615.38
	or 5616 dogs

2)

No.of working hours

3 persons * 7 hrs *5 days * 50 weeks

5250 hours

Total available hours = 5,250 hours

Total dogs required to groom for break-even point = 5,616 dogs

Total hours required (5616 dogs * 1 hour) = 5616 hours

If it takes an average of one hour to groom, it is not possible to achieve the break-even because of the shortage of 366 hours.

PART 2

1)

Contribution per unit
Service charge	$              38
Variable cost	$                6
Contribution	$              32

Total fixed costs	$ 1,46,000
Contribution per unit	$              32
Break even point	4,562.50
	or 4,563 dogs

2)

Total required units for 3 persons	4563 dogs
per person (4563/3) units	1521 dogs
Total no of days (50 weeks * 5 days)	250 days
no of dogs to groom per day by each person	6.08 dogs

PART 3

1)

No of hours	5250
No of dogs can be groomed	5250
Contribution per dog	$ 26
Total contribution (5250*26)	$ 1,36,500
Fixed cost	$ 1,46,000
Loss	$ (9,500)

It is not viable to start busniess because of with 5,250 hours and $32 charge for dog, the business will run into loss.

2)

Fixed cost	$ 1,46,000
No of aviable hours	5250 hours
Contribution required (146000/5250)	$ 27.81
Variable cost	$ 6
Price to be charged	$ 33.81

3)

Break-even point = Fixed cost/Contribution per unit

By increasing the selling price, contribution per unit will increase. If the denominator increases, no of units to achieve break-even will decrease. Units excess of break-even helps in increasing profit.