Question

Tracy Stevens opened a hair salon, named "Tracy Trims specializing in trims that maintain customer's hairstyles. The only service available at Tracy's Trims is minor variations on a "30 minute" haircut for which the customer is charged $20. The shop has five (5) newly trained "trimmers. (Tracy does not work in the salon. And, as owner/entrepreneur, she takes no salary.) Her annual cost structure is as follows: Trimmer annual salary (per person): $36,000 Leases equipment cost per year: 2.400 Store fixtures depreciation per month 400 Hair cutting supplies per year 1,500 Salon Lease per month 2,000 200 Utilities per month on average Tracy is looking at her cost structure and is concerned about making a profit. She is looking at three options: Option 1: All cost remain the same as shown above Option 2: The landlord has given her the option to pay $1000 per month rent plus 20% of the monthly total revenue. Option 3. Pay the trimmer a 50% commission on each hair cut instead of the annual salary. Option 4: both Option 2 and Option 3 together Option 5: If all costs remain the same as shown above in option 1, and Tracy introduces a new 1-hour service called "wash, cut, and style and can charge $50 for this service, monthly demand for this service is 80 bookings. How many "Tracy Trims" and "wash, cut, and Style" should the business try to book each month?

Answer 1

Particulars	Option 1	Option 2	Option 3	Option 4
Salary	180000	180000	0	0
Lease equip	2400	2400	2400	2400
Supplies	1500	1500	1500	1500
Lease- saloon	24000	12000	24000	12000
Utilities	2400	2400	2400	2400
Depreciation	4800	4800	4800	4800
Total fixed costs	215100	203100	35100	23100
Lease rent	0	20% revenue	-	20% revenue
Commission		-	50% revenue	20% revenue
Total variable cost per unit		20*0.2=4	20*0.5=10	20*0.7=14
Contribution/unit	20	16	10	6
Break even haircuts	215000/20=10750 haircuts	12694 haircuts	3510 haircuts	1650 haircuts

Option 5:

Monies recovered in wash, cut and style= 50*80*12m=48000

Remaining fixed costs=215100-48000=167100

So, haircuts required to break even=167100/20=8355 haircuts

So, in a month 80 wash, cut, styles and 8355/12=696 haircuts

If worked for 5 days sales of the other two days will drop and impact adversely. However, commission on sales will also get impacted.