Question

3-39 CVP, target operating income, service firm. Modern Beauty Parlor provides beauty treatment for women. Its average monthly variable costs per woman are as follows: Materials for beauty treatment $110 Beautician's commission 50 Other supplies (soaps, napkins, etc.) Total $200 40 Monthly fixed costs consist of the following: Rent Utilities Advertisements in a local TV channel Salaries Miscellaneous Total $1,250 300 250 1,500 300 $3,600 Modern Beauty charges $250 per woman on an average. Required: 1. Calculate the breakeven point. 2. Modern Beauty's target operating income is $4,000 per month. Compute the number of customers required to achieve the target operating income. 3. The parlor wants to move to another building for geographical advantage. Monthly rent for the new building is $2,350. With the objective of better visibility for the prospective customers, it plans to advertise on another local TV channel, incurring a monthly cost of $420. By how much should the parlor increase its average fees per customer to meet the target operating income of $4,000 per month, assuming the same number of customers as in requirement 2?

Answer 1

1. Contribution margin per person = Charge per customer - Variable cost per customer = $ 250 - $ 200 = $ 50.

Break-even point = Fixed Costs / Contribution Margin per person = $ 3,600 / $ 50 = 72 customers per month.

2. Number of customers required to achieve target operating income = $ ( 3,600 + 4,000 ) / $ 50 = 152 customers.

3. Total fixed cost per month = $ 3,600 - $ 1,250 + $ 2,350 + $ 420 = $ 5,120

Let the fees charged to customers be P.

152 P - ( 200 x 152 ) = $ 5,120 + $ 4,000

or P = $ 260

Therefore, the parlor should increase its average charges per customer by $ 10.

Answer 2

1. Contribution margin per person = Charge per customer - Variable cost per customer = $ 250 - $ 200 = $ 50. Break-even point = Fixed Costs / Contribution Margin per person = $ 3,600 / $ 50 = 72 customers per month. 2. Number of customers required to achieve target operating income = $ ( 3,600 + 4,000 ) / $ 50 = 152 customers. 3. Total fixed cost per month = $ 3,600 - $ 1,250 + $ 2,350 + $ 420 = $ 5,120 Let the fees charged to customers be P. 152 P - ( 200 x 152 ) = $ 5,120 + $ 4,000 or P = $ 260 Therefore, the parlor should increase its average charges per customer by $ 10.